Income Tax Regulations

6204 (1) For the purposes of paragraph 110(1)(d) 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, where, 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 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 share was issued or sold 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 another corporation with which the corporation was not dealing 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 or sold, and

  • (iii) having regard to all the circumstances, including the terms of the agreement, it can 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 to the holder 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 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 the corporation 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.

(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.