“Using a specified class of shares can disassociate companies..”
There are many situations where two companies are associated when that was never the intention of the shareholders. Sometimes association occurs unintentionally where there is an estate freeze. Usually, the parent who owns the common shares exchanges his or her shares for frozen preferred shares. The parent’s children or a trust for the benefit of the children usually purchases the common shares of the company. Depending on the attributes of the preferred shares, the operating company may still be associated with other companies owned by the parent. In those situations where the parent truly gives up control of the company to his/her kids, this is an unintentional result.
It is possible, however, to ensure that the operating company being frozen is not associated with the other companies held by the parent. If the frozen shares that the parent takes back are a “specified class,” then the parent’s investment in the operating company is not considered in determining if that company is associated with the other companies. Pursuant to subsection 256(1.1), a specified class must have the following attributes:
- Shares are not convertible or exchangeable;
- Shares are non-voting;
- There is an annual dividend rate on the shares that does not exceed the prescribed rate of interest at the time the shares were issued;
- The redemption value of the shares must not exceed the fair market value of consideration received when the shares were issued.
The only one of the attributes mentioned above that could be an issue with the parent doing the freeze would be the attribute of non-voting. The parent must be comfortable having no votes in the future of the company in order to disassociate the companies. Whether a client is interested in disassociating the companies by losing control of that company will depend on each specific situation. If, however, it is a family trust that will own the common shares, it is possible that the parent could still have control of the company by being a trustee who votes the common shares held by the trust.
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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
