Income Tax Act (tax considerations) · Freeze & reorganisation mechanics
The freeze shares do not meet the "specified class" conditions
What the check looks for
Fixed-value preferred shares can be drafted to the "specified class" conditions in s. 256(1.1). Those conditions include that the shares are not convertible or exchangeable, are non-voting, carry a dividend that is a fixed amount or fixed percentage of the issue consideration at an annual rate that cannot exceed the prescribed rate, and carry a redemption entitlement that cannot exceed the fair market value of the consideration the shares were issued for plus unpaid dividends. Shares of a specified class are left out of certain share-ownership tests in the association rules. That does not make association impossible: association also turns on control and on the other ownership tests. (Nothing in s. 256(1.1) requires the dividend itself to be non-cumulative, paragraph (e) expressly allows unpaid dividends into the redemption cap.)
Authority: ITA s. 256(1.1) ("specified class"); s. 256 (association)
The Income Tax Act sets no requirements for the articles; this is a tax consideration that can follow from how they are drafted.
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