Subsection 191(1) - Definitions
Private Holding Corporation
Administrative Policy
3 March 1992 T.I. (Tax Window, No. 17, p. 22, ¶1776)
A venture capital corporation would not meet the requirement that its only undertaking be "the investing of its funds" if it has a substantial interest in another corporation or if it receives substantial fees in respect of the services that it provides to corporations.
Subsection 191(2) - Substantial interest
Administrative Policy
91 C.R. - Q.7
The beneficiary of a trust owning shares of a corporation is not itself considered to have a substantial interest.
88 C.R. - Q.38
The determination of whether a shareholder has a substantial interest in a corporation is made before rather than after the redemption of the shares held by it.
Subsection 191(3) - Idem [Substantial interest]
Administrative Policy
18 December 2013 T.I. 2013-0511101E5 F - Substantial interest - Part VI.1
As a result of an estate freeze, X held non-voting and non-participating Class B shares of a Quebec CCPC (the "Corporation"). An inter vivos trust ("Trust"), which had D, F and G as trustees, had subscribed for Class A non-voting participating shares and C special voting shares of Corporation on the estate freeze. D, E (who was the father of D and the brother-in-law of F) and F were related to the deceased spouse of X but not to X; and G was not related to X or the beneficiaries. The Class B shares of X passed under his will to a testamentary trust,with D, F and G being the executors. With a view to accessing s. 164(6), the executors retract the Class B shares – but before this occurs, Corporation redeems the Class C voting shares which, in turn, causes the Class B shares to become voting pursuant to s. 48(2) of the Quebec Business Corporations Act (a provision which effectively deems all shares to become voting whenever none otherwise has voting rights).
Respecting whether s. 191(3)(a) could apply, CRA noted that the estate did not acquire an interest in Corporation (as its voting interest arose only through an application of the corporate law), and the acquisition of the Class C shares by Corporation did not have one of the described tax avoidance purposes.
Respecting s. 191(3)(b), CRA noted that although Corporation acquired the Class C shares, it could not be considered to have a substantial interest in itself and, conversely, it acquired those shares from a person (Trust) who already had a substantial interest in Corporation.
S. 191(3)(d) did not apply as all beneficiaries were related.
Although the redemption of the Class C shares appeared to be an avoidance transaction under s. 245:
As per the Technical Notes…Part VI.I tax contemplates a situation where a taxpayer replaces a debt financing with a taxable preferred share financing…[whereas here] the taxable preferred shares arose under an estate freeze on the common shares of X… . Consequently, there are valid arguments for inferring that there is not an abuse...in this situation, which does not appear to be an "after-tax financing" scenario . [TaxInterpretations translation]
Subsection 191(4) - Deemed dividends
See Also
Dangerfield v. The Queen, 2004 DTC 6025, 2003 FCA 480
A court order that specified that child support was to commence on May 1, 1997 thereby established a "commencement day" for purposes of s. 56.1(4) of the Act notwithstanding that it did not specify that the commencement day was being specified for purposes of the Act.
Henderson Estate v. M.N.R, 73 DTC 5471, [1973] CTC 636 (FCTD), aff'd 75 D.TC 5332, [1975] C.TC 485 (FCA)
Cattanach J. indicated that with respect to a share warrant, shares have been issued by the company, whereas no shares are issued on the granting of a share purchase warrant, and that the bearer of a share purchase warrant is not a shareholder.
Administrative Policy
25 September 1991 Memorandum (Tax Window, No. 10, p. 5, ¶1480)
The conditions in s. 191(4) are not met unless the share terms specify a dollar amount for which the shares are to be redeemed.
15 May 1990 T.I. (October 1990 Access Letter, ¶1483)
Where an individual transfers shares of Opco to Holdco in consideration for retractable preferred shares whose redemption amount will be determined by a resolution of the directors, the redemption amount will be considered to be a specified amount provided that the directors set the redemption amount prior to the issuance of the shares. A formulaic amount is not a specified amount.
May 1990 Vancouver District Office Round Table (October 1990 Access Letter, ¶1445)
Where an asset with a fair market value of $100 is transferred to a corporation for a preferred share having a redemption amount of $100 plus any accrued and unpaid dividends, and the share subsequently is redeemed for $100 plus accrued but unpaid dividends of $10, the specified amount for purposes of s. 191(4) will be $100. s. 191(5) would specifically exclude the $10 referrable to unpaid dividends from the application of s. 191(4).
May 1990 Meeting of Toronto Chapter of I.C.A.O. (October 1990 Access Letter, ¶1445)
"The terms or conditions of the share or the agreement in respect of the share must specify an actual dollar amount for the purposes of subsection 191(4). By specifying an amount, the corporation is not precluded from redeeming the share for a greater amount, but the amount of the excess will not qualify as an exempted dividend by virtue of subsection 191(5)."
Discussion of the impact on Part IV.1 and VI.1 tax of the operation of a price adjustment clause.
89 C.R. - Q.20
"Unless the terms and conditions of the share or an agreement in respect of the share specified a different amount for the purposes of ss.191(4), the specified amount will be the amount for which the share is to be redeemed, acquired or cancelled. The Department will not permit the specified amount to be based on a formula which relates to some other share nor will the Department permit a price adjustment clause."
88 C.R. - Q.37
Provided that the preferred shares received by minority common shareholders on an amalgamation squeeze-out specify in their terms a redemption amount which does not exceed the fair market value of their common shares (which were not taxable preferred shares), s. 191(4) will apply to the subsequent deemed dividend.
Articles
Charles P. Marquette, "Hybrid Sale of Shares and Assets of a Business", Canadian Tax Journal, (2014) 62:3, 857 – 79.
CRA interpretation of specified amount (pp. 877-8)
[I]n a hybrid transaction in in which a redemption of the shares will trigger a deemed dividend, a specific exemption in subsection 191(4) will treat the deemed dividend as an excluded dividend, to exempt the deemed dividend where the specified amount for which the shares are redeemed does not exceed the fair market value of the consideration for which they were issued. In the CRA's view, the specified amount must be a dollar amount and cannot be fixed at a later date, or be subject to a price adjustment clause or described by way of a formula. [fn 55: See…1989 Conference Report…[CTF Roundtable]… and… 59342, May 15, 1990.] However, in a private ruling, the CRA accepted a redemption amount that was subject to a price adjustment clause where a separate specified dollar amount was also provided.
Subsection 191(5) - Where s. (4) does not apply
Administrative Policy
1996 Ruling 3-960956 -
Although shares would be short-term preferred shares if the price paid to a shareholder therefor was in excess of the greater of the fair market value at the date the agreement was entered into and the fair market value at the time of acquisition, the resulting deemed dividend up to the specified amount (provided the specified amount does not exceed the fair market value of the shares immediately before the agreement was entered into) will be excluded dividends and excepted dividends.