In a post I wrote about a year ago, I complained about the CRA’s then-recent pronouncements on control premiums. The CRA, at the most recent Canadian Tax Foundation BC Conference, recanted this position, at least in part, as follows:
As stated in Income Tax Technical News No. 38, the CRA does not have an established position on valuing different types of property, including shares, as the valuation is dependent on the facts and circumstances of each situation. Information Circular 89-3 (IC 89-3), Policy Statement on Business Equity Valuations, outlines the valuation principles and policies that the CRA considers and follows in the evaluation of securities and intangible property of closely held corporations for income tax purposes. In determining the fair market value of a class of shares, the CRA determines the fair market value of the corporation ‘‘as a whole’’ or ‘‘en bloc’’ and then allocates the value to each class of shares in isolation. The fair market value of each class is determined according to the rights and restrictions of each class and voting control is a right that may have significant value. [Emphasis added.]
The CRA’s position is that non-participating controlling shares have some value and may therefore bear a premium. However, in the context of an estate freeze of a Canadian-controlled private corporation, where the freezor, as part of the estate freeze, keeps controlling non-participating preference shares in order to protect his economic interest in the corporation, the CRA generally accepts not to take into account any premium that could be attributable to such shares for the purposes of subsection 70(5) of the Income Tax Act at the freezor’s death.
David Louis, in reporting on this development in the October 1 issue of CCH’s Tax Topics, noted the following about this statement:
- The CRA reiterates its view that voting power is valuable.
- The CRA’s new position appears to accommodate only subsection 70(5) freezes, which leaves open the possibility that the concession will not be extended to freezes executed for the purposes of income splitting or exemption multiplication.
In addition, the CRA seems to believe that the voting control should exist to protect the freezor’s economic interest. Query whether, to satisfy the CRA on this point, the voting control must diminish and terminate if the freezor’s economic interest diminishes and terminates.
Some of the controversy continues.
