2020-0842251C6 CALU 2020–Q7-Valuation of private company shares

Principal Issues: Follow-up to ITTN 44 and 2009 British Columbia Tax Conference. In the context of an estate freeze of a private corporation, does it continue to be the CRA's position that no premium will be applied to controlling non-participating preference shares issued to protect the economic interest of the freezor in the corporation?

Position: No change in position. Generally no control premium in circumstances described.

Reasons: Consistent with previous positions.

Author: Plant, Vicki
Section: 70(5)

2020 CALU Round Table – July 2020

Question 7 - Valuation of Private Company Shares

Background

At the 2009 British Columbia tax conference the CRA stated:

"...non-participating controlling shares have some value and may therefore bear a premium. However, in the context of an estate freeze of a Canadian-controlled private corporation, where the freezor, as part of an estate freeze, keeps controlling non-participating preference shares in order to protect his economic interest in the corporation, the CRA generally accepts not to take into account any premium that could be attributable to such shares for the purposes of subsection 70(5) of the Income Tax Act at the freezor's death."

In ITTN-44, the CRA commented that, in the context of estate freezes of private corporations:

“Provided that the owners of all the shares of the corporation act in a manner consistent with the assumption that no value attaches to the voting rights, and the rights are eventually extinguished for no consideration, the CRA will generally not attribute value to the rights. If the holder of the rights uses them to run the corporation in conflict with the common shareholders or seeks or is offered consideration for them, it would be difficult for the CRA to ignore this evidence of value.”

Question

Can the CRA confirm its position as referenced above in relation to the valuation of non-participating controlling shares continues to be its position so that, in the circumstances outlined, no premium will be applied to the controlling shares?

Response

The positions stated at the 2009 British Columbia tax conference and in ITTN-44, described above, continue to reflect the CRA’s current policy.

Vicki Plant
July 8, 2020
2020-084225

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