In our Spring 2009 Newsletter, Richard Fontaine commented on the fact that the Vancouver Office of the Canada Revenue Agency (“CRA”) is, apparently, assessing a “control” premium on the value of a private company’s voting non-participating preference shares (“control shares”) acquired on an estate freeze and held by a taxpayer at death. This was contrary to what was generally believed to be the CRA’s long standing assessing practice and caused much consternation in the tax community.
At the 2009 British Columbia Tax Conference, the CRA had some good news with respect to the valuation of control shares issued on an estate freeze. The CRA stated that although “… non-participating controlling shares have some value and may therefore bear a premium … 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.”
This is certainly welcome news but does not mean that a control premium will never be added to the value of control shares. The CRA’s policy statement is very narrowly phrased and among other things, the policy:
- applies only in the context of an estate freeze;
- applies only to the deemed disposition on the death of the owner of the control shares;
- does not apply to the deemed disposition of control shares on the death of the spouse beneficiary of a spousal trust;
- does not apply to the sale or gift of control shares; and
- may not apply after the “value” shares issued on an estate freeze have been redeemed.
In situations where control shares are issued there are strategies that can eliminate or reduce the risk of valuation problems. It is also a good idea to periodically review how control of a private corporation will be dealt with on the death of the controlling shareholder.