CRA applies the two-step approach to entity classification to find that MRPS (Luxembourg hybrid instruments which are “very similar to traditional shares under Canadian business corporations statutes”) are equity

After having treated mandatorily redeemable preferred shares (“MRPS”) as equity in a number of rulings, CRA has now provided a detailed analysis in support of this characterization in an internal technical interpretation, so that the Canadian parent in question was entitled to treat MRPS distributions from two Luxcos as coming out of exempt surplus.

CRA indicated that the two-step approach to entity classification is “often of considerable assistance in characterizing foreign instruments,” stated that “the status of the MRPS under the governing corporate and commercial law is of critical importance to the analysis,” and noted that their “characteristics are very similar to traditional shares under Canadian business corporations statutes,” including that they were governed by articles of incorporation, ranked after debt in a bankruptcy, could only be redeemed from funds available for distribution under Luxembourg law or from the proceeds of a new share issuances and voted on corporate matters such as the election of directors (although being non-voting would not have established that they were not shares). CRA also stated:

The fact that the MRPS must be redeemed on or before a stipulated date does not detract from their character as shares.

CRA also did not profess any concern that the Canadian parent was obligated under a “Keep Well” agreement with one of the Luxcos to subscribe for ordinary shares if the Luxco had insufficient funds to redeem the MRPS at their maturity, and that if the MRPS for the other Luxco could not be redeemed at their full redemption price, the residual portion remained payable and bore interest.

Neal Armstrong Summaries of 2015-0604491I7 under s. 248(1) – share and s. 90(2).