As readers of this blog know, the Ontario Business Corporations Act was amended late last year to provide that
The articles [of a Corporation] may provide that two or more classes of shares or two or more series within a class of shares may have the same rights, privileges, restrictions and conditions.
Robin MacKnight, writing in the Canadian Tax Foundation’s Tax for the Owner-Manager in July, pointed out that:
At the 2007 STEP National Conference, the CRA was asked how it would interpret this change in the context of the attribution and income-splitting rules. Not surprisingly, its response was that tax consequences depend on more than just a name, and it would not necessarily recognize a distinction between classes of shares on that basis alone.
Robin called the OBCA amendment “nonsensical” and criticized it in the following terms:
[T]he courts seem clear that it is exactly those differences [in rights, privileges, restrictions and conditions] that are essential in defining and distinguishing different classes of shares for the purposes of income splitting, calculating and separating PUC and ACB, and general tax planning.
I wrote to Robin shortly after he published that article to remonstrate with him:
First of all, is it not open to the legislature to deem shares to belong to different classes even though they have identical rights, regardless of the position previously taken by the courts? Moreover, what is the authority of the CRA to ignore the law of Ontario in this regard? If so, what else in our legal system can it ignore when it suits its purposes?
My standard share provisions contain the necessary distinctions to distinguish classes of shares, and they will continue to do so, in light of the CRA’s pronouncement to which you allude (I have no wish to fight a test case on the subject!). But wouldn’t we be better off if we could dispense with “distinctions” that, in substance, are no such thing?
The first point is worth emphasizing. A “deeming” rule is a fiction created by the legislature. It is open to the legislature to call “night” “day” and “day” “night”, if it suits. The Income Tax Act is replete with such rules. For example, the courts had held that an amount received by a shareholder on a redemption of her shares is a capital receipt, which was not taxable as income before the Act was amended to tax capital gains. The Act, however, quite sensibly creates a fiction for tax purposes to the effect that the amount received for the shares represents a dividend—a “deemed dividend”—to the extent that the amount received exceeds tax paid-up capital.
Nonetheless, all other things being equal, rather than pick a fight with the CRA and pose as a knight-errant on a quest to uphold the rule of law, it might be preferable (because less expensive for one’s clients) to maintain the artificial distinctions in share provisions that supposedly distinguish classes.
