CRA confirms that where two share classes are inter-convertible, a capped liquidation entitlement for one class will cause both to be non-prescribed shares under Reg. 6204(1)(a)(iii)

Class X shares of a corporation were convertible at the holder’s option into Class Y shares of the corporation, and those Class Y shares, in turn, were convertible at the holder’s option into Class X shares. On a winding up, holders of Class Y shares were entitled to an amount determined according to a formula in the articles, and no more. Consequently, the Class Y shares did not comply with Reg. 6204(1)(a)(ii) (i.e., their liquidation entitlement was capped) and, therefore, were not prescribed shares.

The question posed was whether the circular conversion attributes of the two classes caused the Class X shares to also not qualify as prescribed shares, notwithstanding that the rights of a Class Y shareholder were indirectly the same as those of a Class X shareholder by virtue of the conversion right.

The Directorate confirmed that the right to convert Class X shares into Class Y shares did not comply with Reg. 6204(1)(a)(iii) (because the Class Y shares were not prescribed shares), so that the Class X shares also were not prescribed shares. It stated that in light of the circular nature of the conversion rights, both Class X and Class Y shares must meet the requirements of Reg. 6204(1)(a)(iii), which was not the case here.

Neal Armstrong. Summary of 25 August 2025 Internal T.I. 2023-0974491I7 F under Reg.6204(1)(a)(iii).