Attributes of Estate Freeze Preferred Shares
Attributes of Estate Freeze Preferred Shares (CRA Doc # 2008-0285241C6)
The CRA has published an answer to a question posed during the Round Table on Federal Taxation held at the APFF – 2008 Conference (Association de Planification Fiscale et Financière) regarding the attributes that must be attached to estate freeze preferred shares.
When implementing an estate freeze, it is important that the total fair market value (FMV) of the consideration received in freeze preferred shares and property other than shares, is equal to the FMV of the common shares exchanged. Otherwise, one of subsections 15(1), 51(2) and 86(2) of the ITA could apply to tax a benefit conferred on a shareholder.
The CRA has confirmed and clarified that when estate freeze preferred shares have the following attributes, they will generally be considered to have the same FMV as the common shares exchanged:
- Redeemable at the option of the holder at a redemption price equal to the FMV of the common shares exchanged, plus any declared and unpaid dividends;
- No dividend can be paid on other classes of shares for an amount that would reduce the FMV of the preferred shares below their redemption price, or that would result in the corporation not having the necessary net assets for the redemption of the preferred shares;
- They must have, at least, voting rights on any matter involving a modification to the attributes attached to them (these voting rights can be provided by the relevant corporate law or the articles of incorporation);
- Absolute priority on all other classes of shares in the event of the distribution of the assets of the corporation on a winding-up or a dissolution of the corporation or any other distribution of its assets up to the redemption price, plus any declared and unpaid dividends;
- Absolute priority on all the other classes of shares with respect to the redemption of the shares, and the corporation cannot acquire shares of other classes before the redemption of all the preferred shares;
- No restriction with respect to the transfer of the preferred shares (other than the restrictions required, if applicable, by the relevant corporate law in order to qualify as a private corporation); and
- Containing a price adjustment clause for the redemption price of the preferred shares which is applicable when the redemption price agreed to by the parties is not equal to the FMV of the common shares exchanged, and also containing other appropriate adjustments when the shares have already been redeemed at the time of an adjustment of the redemption price.
- Before undertaking an estate freeze, ensure the articles of the corporation provide for a class of shares of the corporation with the attributes listed above; and
- After undertaking an estate freeze, ensure that no dividend is paid that would result in the corporation not having the necessary net assets for the redemption of the preferred shares.