Income Tax Regulations (C.R.C., c. 945)

6203 (1) For the purposes of subsection 192(6) of the Act, a prescribed share of the capital stock of a taxable Canadian corporation is a share (other than a share acquired by a taxpayer under circumstances referred to in section 66.3 of the Act, a share acquired as consideration for a disposition of property in respect of which an election was made under subsection 85(1) or (2) of the Act and a share that can be considered to have been issued, directly or indirectly, for consideration that includes other shares of the capital stock of the corporation) where, at the time it is issued,

• (a) under the terms or conditions of the share or any agreement in respect of the share or its issue,

  • (i) the amount of the dividends (in this section referred to as the “dividend entitlement”) that the corporation may declare or pay on the share is not limited to a maximum amount or fixed at a minimum amount at that time or at any time thereafter by way of a formula or otherwise,

  • (ii) the amount (in this section referred to as the “liquidation entitlement”) that the holder of the share is entitled to receive on the share on the dissolution, liquidation or winding-up of the corporation is not limited to a maximum amount or fixed at a minimum amount by way of a formula or otherwise,

  • (iii) the share cannot be converted into any other security, other than into another security of the corporation that would, if it were issued for consideration that does not include other shares of the capital stock of the corporation, be a prescribed share,

  • (iv) the holder of the share cannot at that time or at any time thereafter cause the share to be redeemed, acquired or cancelled by the corporation or any specified person in relation to the corporation, except where the redemption, acquisition or cancellation is required pursuant to a conversion that is not prohibited by subparagraph (iii),

  • (v) no person or partnership has, either absolutely or contingently, an obligation to reduce, or to cause the corporation to reduce, at that time or at any time thereafter, the paid-up capital in respect of the share, except where the reduction is required pursuant to a conversion that is not prohibited by subparagraph (iii),

  • (vi) no person or partnership has, either absolutely or contingently, an obligation at that time or at any time thereafter to

    • (A) provide assistance to acquire the share,

    • (B) make a loan or payment,

    • (C) transfer property, or

    • (D) otherwise confer a benefit by any means whatever, including the payment of a dividend,

    that may reasonably be considered to be, directly or indirectly, a repayment or return by the corporation or a specified person in relation to the corporation of all or part of the consideration for which the share was issued,

  • (vii) neither the corporation nor any specified person in relation to the corporation has, either absolutely or contingently, the right or obligation to redeem, acquire or cancel, at that time or at any time thereafter, the share in whole or in part other than for an amount that approximates the fair market value of the share (determined without reference to any such right or obligation), and

  • (viii) no person or partnership has, either absolutely or contingently, an obligation to provide, at that time or at any time thereafter, any form of undertaking with respect to the share (including any guarantee, security, indemnity, covenant or agreement and including the lending of funds to or the placing of amounts on deposit with, or on behalf of, the holder of the share or any specified person in relation to the holder) that may reasonably be considered to have been given to ensure that

    • (A) any loss that the holder of the share may sustain by virtue of the holding, ownership or disposition of the share is limited in any respect, or

    • (B) the holder of the share will derive earnings by virtue of the holding, ownership or disposition of the share;

• (b) the corporation or a specified person in relation to the corporation cannot reasonably be expected to, within two years after the time the share is issued,

  • (i) acquire or cancel the share in whole or in part,

  • (ii) reduce the paid-up capital of the corporation in respect of the share, or

  • (iii) make a payment, transfer or other provision, directly or indirectly, by way of a dividend, loan, purchase of shares, financial assistance to any purchaser of the share or in any other manner whatever, that may reasonably be considered to be a repayment or return of all or part of the consideration for which the share was issued

  otherwise than as a consequence of the payment of a dividend paid by a subsidiary wholly-owned corporation to its parent, of an amalgamation of a subsidiary wholly-owned corporation or of a winding-up to which subsection 88(1) of the Act applies;

• (c) no person or partnership can reasonably be expected to provide, within two years after the time the share is issued, any form of undertaking with respect to the share (including any guarantee, security, indemnity, covenant or agreement and including the lending of funds to, or the placing of amounts on deposit with, or on behalf of, the holder of the share or any specified person in relation to the holder); and

• (d) it cannot reasonably be expected that any of the terms or conditions of the share or any existing agreement in respect of the share or its issue will thereafter be modified or amended, or that any new agreement in respect of the share or its issue will be entered into, within two years after the time the share is issued, in such a manner that the share would not be a prescribed share if it had been issued at the time of such modification or amendment or at the time the new agreement is entered into.

(2) For the purposes of subsection (1),

• (a) the dividend entitlement of a share of the capital stock of a corporation shall be deemed not to be limited to a maximum amount or fixed at a minimum amount where it may reasonably be considered that all or substantially all of the dividend entitlement is determinable by reference to the dividend entitlement of another share of the capital stock of the corporation that meets the requirements of subparagraph (1)(a)(i);

• (b) the liquidation entitlement of a share of the capital stock of a corporation shall be deemed not to be limited to a maximum amount or fixed at a minimum amount where it may reasonably be considered that all or substantially all of the liquidation entitlement is determinable by reference to the liquidation entitlement of another share of the capital stock of the corporation that meets the requirements of subparagraph (1)(a)(ii);

• (c) where a corporation has merged or amalgamated with one or more other corporations, the corporation formed as a result of the merger or amalgamation shall be deemed to be the same corporation as, and a continuation of, each of its predecessor corporations and a share issued on the merger or amalgamation as consideration for another share shall be deemed to be the same share as the share for which it was issued but this paragraph does not apply if the share issued on the merger or amalgamation is not a prescribed share at the time of its issue; and

• (d) an agreement entered into between the first purchaser of a share and another person or partnership, other than a specified person in relation to the corporation issuing the share, for the sale of the share to that other person or partnership shall be deemed not to be an undertaking with respect to the share.

(3) For the purposes of subsections (1) and (2), specified person, in relation to a corporation or a holder of a share, as the case may be (in this subsection referred to as the “taxpayer”), means any person or partnership with whom the taxpayer does not deal at arm’s length or any partnership or trust of which the taxpayer (or a person or partnership with whom the taxpayer does not deal at arm’s length) is a member or beneficiary, respectively.

6204 (1) For the purposes of subparagraph 110(1)(d)(i.1) of the Act, a share is a prescribed share of the capital stock of a corporation at the time of its sale or issue, as the case may be, if, at that time,

• (a) under the terms or conditions of the share or any agreement in respect of the share or its issue,

  • (i) the amount of the dividends (in this section referred to as the “dividend entitlement”) that the corporation may declare or pay on the share is not limited to a maximum amount or fixed at a minimum amount at that time or at any time thereafter by way of a formula or otherwise,

  • (ii) the amount (in this section referred to as the “liquidation entitlement”) that the holder of the share is entitled to receive on the share on the dissolution, liquidation or winding-up of the corporation is not limited to a maximum amount or fixed at a minimum amount by way of a formula or otherwise,

  • (iii) the share cannot be converted into any other security, other than into another security of the corporation or of another corporation with which it does not deal at arm’s length that is, or would be at the date of conversion, a prescribed share,

  • (iv) the holder of the share cannot at that time or at any time thereafter cause the share to be redeemed, acquired or cancelled by the corporation or any specified person in relation to the corporation, except where the redemption, acquisition or cancellation is required pursuant to a conversion that is not prohibited by subparagraph (iii),

  • (v) no person or partnership has, either absolutely or contingently, an obligation to reduce, or to cause the corporation to reduce, at that time or at any time thereafter, the paid-up capital in respect of the share, except where the reduction is required pursuant to a conversion that is not prohibited by subparagraph (iii), and

  • (vi) neither the corporation nor any specified person in relation to the corporation has, either absolutely or contingently, the right or obligation to redeem, acquire or cancel, at that time or any later time, the share in whole or in part other than for an amount that approximates the fair market value of the share (determined without reference to any such right or obligation) or a lesser amount;

• (b) the corporation or a specified person in relation to the corporation cannot reasonably be expected to, within two years after the time the share is sold or issued, as the case may be, redeem, acquire or cancel the share in whole or in part, or reduce the paid-up capital of the corporation in respect of the share, otherwise than as a consequence of

  • (i) an amalgamation of a subsidiary wholly-owned corporation,

  • (ii) a winding-up to which subsection 88(1) of the Act applies, or

  • (iii) a distribution or appropriation to which subsection 84(2) of the Act applies; and

• (c) it cannot reasonably be expected that any of the terms or conditions of the share or any existing agreement in respect of the share or its sale or issue will be modified or amended, or that any new agreement in respect of the share, its sale or issue will be entered into, within two years after the time the share is sold or issued, in such a manner that the share would not be a prescribed share if it had been sold or issued at the time of such modification or amendment or at the time the new agreement is entered into.

(2) For the purposes of subsection (1),

• (a) the dividend entitlement of a share of the capital stock of a corporation shall be deemed not to be limited to a maximum amount or fixed at a minimum amount where it may reasonably be considered that all or substantially all of the dividend entitlement is determinable by reference to the dividend entitlement of another share of the capital stock of the corporation that meets the requirements of subparagraph (1)(a)(i);

• (b) the liquidation entitlement of a share of the capital stock of a corporation shall be deemed not to be limited to a maximum amount or fixed at a minimum amount where it may reasonably be considered that all or substantially all of the liquidation entitlement is determinable by reference to the liquidation entitlement of another share of the capital stock of the corporation that meets the requirements of subparagraph (1)(a)(ii); and

• (c) the determination of whether a share of the capital stock of a particular corporation is a prescribed share shall be made without reference to a right or obligation to redeem, acquire or cancel the share, or to cause the share to be redeemed, acquired or cancelled, where

  • (i) the person (in this paragraph referred to as the “holder”) to whom the share is sold or issued is, at the time the share is sold or issued, dealing at arm’s length with the particular corporation and with each corporation with which the particular corporation is not dealing at arm’s length,

  • (ii) the right or obligation is provided for in the terms or conditions of the share or in an agreement in respect of the share or its issue and, having regard to all the circumstances, it can reasonably be considered that

    • (A) the principal purpose of providing for the right or obligation is to protect the holder against any loss in respect of the share, and the amount payable on the redemption, acquisition or cancellation (in this subparagraph and in subparagraph (iii) referred to as the “acquisition”) of the share will not exceed the adjusted cost base of the share to the holder immediately before the acquisition, or

    • (B) the principal purpose of providing for the right or obligation is to provide the holder with a market for the share, and the amount payable on the acquisition of the share will not exceed the fair market value of the share immediately before the acquisition, and

  • (iii) having regard to all the circumstances, it can reasonably be considered that no portion of the amount payable on the acquisition of the share is directly determinable by reference to the profits of the particular corporation, or of another corporation with which the particular corporation does not deal at arm’s length, for all or any part of the period during which the holder owns the share or has a right to acquire the share, unless the reference to the profits of the particular corporation or the other corporation is only for the purpose of determining the fair market value of the share pursuant to a formula set out in the terms or conditions of the share or the agreement in respect of the share or its issue, as the case may be.

(3) For the purposes of subsection (1), specified person, in relation to a corporation, means

• (a) any person or partnership with whom the corporation does not deal at arm’s length otherwise than because of a right referred to in paragraph 251(5)(b) of the Act that arises as a result of an offer by the person or partnership to acquire all or substantially all of the shares of the capital stock of the corporation, or

• (b) any partnership or trust of which the corporation (or a person or partnership with whom the corporation does not deal at arm’s length) is a member or beneficiary, respectively.

(4) For the purposes of subsection (3), the Act shall be read without reference to subsection 256(9) of the Act.

6205 (1) For the purposes of subsections 110.6(8) and (9) of the Act and subject to subsection (3), a prescribed share is a share of the capital stock of a corporation where

• (a) under the terms or conditions of the share or any agreement in respect of the share or its issue,

  • (i) at the time the share is issued,

    • (A) the amount of the dividends (in this section referred to as the “dividend entitlement”) that the corporation may declare or pay on the share is not limited to a maximum amount or fixed at a minimum amount at that time or at any time thereafter by way of a formula or otherwise,

    • (B) the amount (in this section referred to as the “liquidation entitlement”) that the holder of the share is entitled to receive on the share on the dissolution, liquidation or winding-up of the corporation is not limited to a maximum amount or fixed at a minimum amount by way of a formula or otherwise,

    • (C) the share cannot be converted into any other security, other than into another security of the corporation that is, or would be at the date of conversion, a prescribed share,

    • (D) the holder of the share does not, at that time or at any time thereafter, have the right or obligation to cause the share to be redeemed, acquired or cancelled by the corporation or a specified person in relation to the corporation, except where the redemption, acquisition or cancellation is required pursuant to a conversion that is not prohibited by clause (C),

    • (E) no person or partnership has, either absolutely or contingently, an obligation to reduce, or to cause the corporation to reduce, at that time or at any time thereafter, the paid-up capital in respect of the share, otherwise than by way of a redemption, acquisition or cancellation of the share that is not prohibited by this section,

    • (F) no person or partnership has, either absolutely or contingently, an obligation (other than an excluded obligation in relation to the share, as defined in subsection 6202.1(5)) at that time or any time thereafter to

      • (I) provide assistance to acquire the share,

      • (II) make a loan or payment,

      • (III) transfer property, or

      • (IV) otherwise confer a benefit by any means whatever, including the payment of a dividend,

      that may reasonably be considered to be, directly or indirectly, a repayment or return by the corporation or a specified person in relation to the corporation of all or part of the consideration for which the share was issued, and

    • (G) neither the corporation nor any specified person in relation to the corporation has, either absolutely or contingently, the right or obligation to redeem, acquire or cancel, at that time or at any time thereafter, the share in whole or in part, except where the redemption, acquisition or cancellation is required pursuant to a conversion that is not prohibited by clause (C),

  • (ii) no person or partnership has, either absolutely or contingently, an obligation (other than an excluded obligation in relation to the share, as defined in subsection 6202.1(5)) to provide, at any time, any form of undertaking with respect to the share (including any guarantee, security, indemnity, covenant or agreement and including the lending of funds to or the placing of amounts on deposit with, or on behalf of, the holder of the share or any specified person in relation to that holder) that may reasonably be considered to have been given to ensure that

    • (A) any loss that the holder of the share may sustain by virtue of the holding, ownership or disposition of the share is limited in any respect, or

    • (B) the holder of the share will derive earnings by virtue of the holding, ownership or disposition of the share; and

• (b) at the time the share is issued, it cannot reasonably be expected, having regard to all the circumstances, that any of the terms or conditions of the share or any existing agreement in respect of the share or its issue will thereafter be modified or amended or that any new agreement in respect of the share or its issue will be entered into, in such a manner that the share would not be a prescribed share if it had been issued at the time of such modification or amendment or at the time the new agreement is entered into.

(2) For the purposes of subsections 110.6(8) and (9) of the Act and subject to subsection (3), a prescribed share is a share of the capital stock of a particular corporation where

• (a) it is a particular share that is owned by a person and that was issued by the particular corporation as part of an arrangement to that person, to a spouse, common-law partner or parent of that person or, if the person is a trust described in paragraph 104(4)(a) of the Act, to the person who created the trust or by whose will the trust was created or, if the person is a corporation, to another person owning all of the issued and outstanding shares of the capital stock of the corporation or to a spouse, common-law partner or parent of that other person, and

  • (i) the main purpose of the arrangement was to permit any increase in the value of the property of the particular corporation to accrue to other shares that would, at the time of their issue, be prescribed shares if this section were read without reference to this subsection, and

  • (ii) at the time of the issue of the particular share or at the end of the arrangement,

    • (A) the other shares were owned by

      • (I) the person to whom the particular share was issued (in this paragraph referred to as the “original holder”),

      • (II) a person who did not deal at arm’s length with the original holder,

      • (III) a trust none of the beneficiaries of which were persons other than the original holder or a person who did not deal at arm’s length with the original holder, or

      • (IV) any combination of persons described in subclause (I), (II) or (III),

    • (B) the other shares were owned by employees of the particular corporation or of a corporation controlled by the particular corporation, or

    • (C) the other shares were owned by any combination of persons each of whom is described in clause (A) or (B); or

• (b) it is a share that was issued by a mutual fund corporation.

• (c) [Repealed, SOR/90-607, s. 1]

(3) For the purposes of subsections 110.6(8) and (9) of the Act, a prescribed share does not include a share of the capital stock issued by a mutual fund corporation (other than an investment corporation) the value of which can reasonably be considered to be, directly or indirectly, derived primarily from investments made by the mutual fund corporation in one or more corporations (in this subsection referred to as an “investee corporation”) connected with it (within the meaning of subsection 186(4) of the Act on the assumption that the references in that subsection to “payer corporation” and “particular corporation” were read as references to “investee corporation” and “mutual fund corporation”, respectively).

(4) For the purposes of this section,

• (a) the dividend entitlement of a share of the capital stock of a corporation shall be deemed not to be limited to a maximum amount or fixed at a minimum amount where it may reasonably be considered that

  • (i) all or substantially all of the dividend entitlement is determinable by reference to the dividend entitlement of another share of the capital stock of the corporation that meets the requirements of clause (1)(a)(i)(A), or

  • (ii) the dividend entitlement cannot be such as to impair the ability of the corporation to redeem another share of the capital stock of the corporation that meets the requirements of paragraph (2)(a);

• (b) the liquidation entitlement of a share of the capital stock of a corporation shall be deemed not to be limited to a maximum amount or fixed at a minimum amount where it may reasonably be considered that all or substantially all of the liquidation entitlement is determinable by reference to the liquidation entitlement of another share of the capital stock of the corporation that meets the requirements of clause (1)(a)(i)(B);

• (c) where two or more corporations (each of which is referred to in this paragraph as a “predecessor corporation”) have merged or amalgamated, the corporation formed as a result of the merger or amalgamation (in this paragraph referred to as the “new corporation”) shall be deemed to be the same corporation as, and a continuation of, each of the predecessor corporations and a share of the capital stock of the new corporation issued on the merger or amalgamation as consideration for a share of the capital stock of a predecessor corporation shall be deemed to be the same share as the share of the predecessor corporation for which it was issued, but this paragraph does not apply if the share issued on the merger or amalgamation is not a prescribed share at the time of its issue and either

  • (i) the terms and conditions of that share are not identical to those of the share of the predecessor corporation for which it was issued, or

  • (ii) at the time of its issue the fair market value of that share is not the same as that of the share of the predecessor corporation for which it was issued;

• (d) a reference in clauses (1)(a)(i)(D) and (G) and subparagraph (1)(a)(ii) to a right or obligation of the corporation or a person or partnership does not include a right or obligation provided in a written agreement among shareholders of a private corporation owning more than 50% of its issued and outstanding share capital having full voting rights under all circumstances to which the corporation, person or partnership is a party unless it may reasonably be considered, having regard to all the circumstances, including the terms of the agreement and the number and relationship of the shareholders, that one of the main reasons for the existence of the agreement is to avoid or limit the application of subsection 110.6(8) or (9) of the Act;

• (e) where at any particular time after November 21, 1985, the terms or conditions of a share are changed or any existing agreement in respect thereof is changed or a new agreement in respect of the share is entered into, the share shall, for the purpose of determining whether it is a prescribed share, be deemed to have been issued at that particular time; and

• (f) the determination of whether a share of the capital stock of a corporation is a prescribed share for the purposes of subsection (1) shall be made without reference to a right or obligation to redeem, acquire or cancel the share or to cause the share to be redeemed, acquired or cancelled where

  • (i) the share was issued pursuant to an employee share purchase agreement (in this paragraph referred to as “the agreement”) to an employee (in this paragraph referred to as “the holder”) of the corporation or of a corporation with which it did not deal at arm’s length,

  • (ii) the holder was dealing at arm’s length with each corporation referred to in subparagraph (i) at the time the share was issued, and

  • (iii) having regard to all the circumstances including the terms of the agreement, it may reasonably be considered that

    • (A) the amount payable on the redemption, acquisition or cancellation (in this clause and in clause (B) referred to as the “acquisition”) of the share will not exceed

      • (I) the adjusted cost base of the share to the holder immediately before the acquisition, where the acquisition was provided for in the agreement and the principal purpose for its provision was to protect the holder against any loss in respect of the share, or

      • (II) the fair market value of the share immediately before the acquisition, where the acquisition was provided for in the agreement and the principal purpose for its provision was to provide the holder with a market for the share, and

    • (B) no portion of the amount payable on the acquisition of the share is directly determinable by reference to the profits of the corporation, or of another corporation with which it does not deal at arm’s length, for all or any part of the period during which the holder owned the share or had a right to acquire the share, unless the reference to the profits of the corporation or the other corporation is only for the purpose of determining the fair market value of the share pursuant to a formula set out in the agreement.

(5) For the purposes of this section, specified person, in relation to a corporation or a holder of a share, as the case may be (in this subsection referred to as the “taxpayer”), means any person or partnership with whom the taxpayer does not deal at arm’s length or any partnership or trust of which the taxpayer (or a person or partnership with whom the taxpayer does not deal at arm’s length) is a member or beneficiary, respectively.