2022-0933661E5 Meaning of Disposition

Principal Issues: Whether the replacement of a share certificate with a notice of shareholder interest, the replacement of a notice of shareholder interest with a share certificate, or the replacement of a share certificate with another share certificate (or notice of shareholder interest) would result in a disposition for purposes of the Act.

Position: No.

Reasons: See below.

Author: Boychuk, Daryl
Section: Subsection 248(1): definition of "disposition"

XXXXXXXXXX                                                                2022-093366
                                                                                        Daryl Boychuk

June 28, 2022

Dear XXXXXXXXXX

Subject:   “Certificated” and “Uncertificated” Securities

We are writing in response to your request, dated April 19, 2022, for our views on whether there would be a disposition of property for purposes of the Income Tax Act (Canada) (the “Act”) as a result of certain actions involving the proof of ownership of the shares of a corporation. More specifically, your question relates to the following situations:

* Pursuant to Section 54(1) of the Business Corporations Act (XXXXXXXXXX), a corporation (Corporation) which is subject to the laws of XXXXXXXXXX replaces:

o its certificated securities (represented by share certificates) with uncertificated securities (represented by electronic records), by way of a notice to each shareholder with the information required to be stated on a share certificate (notice of shareholder interest) (known as dematerialization); or

o its uncertificated securities or notices of shareholder interest, with share certificates.

* A shareholder loses their share certificate, signs a declaration of loss and indemnity, and receives a replacement share certificate or a notice of shareholder interest from the Corporation.

It is our understanding that, in the situations described above:

* no property will be transferred to or received from the Corporation by the shareholder(s) other than that which relates to the issuance of the new share instrument;

* the new share instrument for each shareholder would continue to reflect their original shareholding, with the same number of the same class of capital stock of the Corporation, in the same proportion as before;

* there would be no change in the interest, rights, or privileges attached to any share of the Corporation, and no concurrent changes in the capital structure of the Corporation; and

* the issuance of the share certificate or the notice of shareholder interest, as the case may be, to evidence the shareholder’s ownership in the Corporation, would not be carried out in conjunction with, or related to, any other transaction or event.

Our Comments

This document provides general comments on the application of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70- 6R12, Advance Income Tax Rulings and Technical Interpretations.

The term “disposition” is defined in subsection 248(1) of the Act. Subparagraph (b)(i) of this definition provides that a disposition includes any transaction or event where a property that is, among other things, a share, is in whole or in part redeemed, acquired, or cancelled.

It is our understanding that a share certificate or notice of shareholder interest is simply evidence of the ownership of a share (or shares). In addition, you have advised us that, in the situations described above, there is no change in the capital structure of the Corporation, the number of outstanding shares, the number of shares held by any shareholder, or the interest, rights, or privileges attached to any share.

It is our view that, in the situations described above, the actions undertaken would not, in and of themselves, constitute a redemption, acquisition, or cancellation of any share of the Corporation, or otherwise result in a disposition of a share of the Corporation.

We trust that these comments will be of assistance.

Yours truly,

Daryl Boychuk
Manager, Reorganizations Section II
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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