7 April 2000 External T.I. 2000-0028125 - TERM PREFERRED SHARE CONVERSION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

(i) Whether the Agency will extend its administrative position with respect to the interpretation of "within 5 years from the date of issue" for purposes of subparagraph 212(1)(b)(vii) of the Act to apply equally to paragraph (b) of the definition of short-term term preferred share such that a share that is issued on June 30, 2000 and which is convertible into another share of that same corporation on or after June 30, 2005, will not be considered to be a short term preferred share since the share is not convertible at any time "within five years from the date of its issue".

(ii) If a corporation issues two classes of shares (class A & class B) that would not otherwise be term preferred shares or short-term preferred shares but for the fact that the class A shares are convertible only into class B shares & the class B shares are convertible only into class A shares would the Agency consider that both the class A and the Class B shares would be term preferred shares and short term preferred shares or would the Agency consider that neither the class A or class B shares are term preferred shares or short-term preferred shares?

Position TAKEN:

(i) No

(ii) A conversion feature into a share of another class which in turn is convertible into the 1st class would generally not in & of itself mean that either share was a term preferred share.

Reasons FOR POSITION TAKEN:

(i) The words in the specific provision of the Act at issue, Section 27(5) of the Interpretation Act (Canada) & a legal opinion.

(ii) Consistent with the position adopted in ruling 1999-001121

XXXXXXXXXX 2000-002812
P. Diguer CGA
Attention: XXXXXXXXXX

July 4, 2000

Dear Sir:

Re: Short Term Preferred Shares and Term Preferred Shares

This is in reply to your letter dated May 25, 2000 in which you request the Canada Customs & Revenue Agency's (the "Agency") views on two issues relating to the definition of short term preferred share. The expression "short term preferred share" as referred to here and subsequently has the meaning assigned by subsection 248(1) of the Income Tax Act (Canada) (the "Act").

In particular you ask:

(i) Will the Agency extend its administrative position with respect to the interpretation of "within 5 years from the date of issue" for purposes of subparagraph 212(1)(b)(vii) of the Act to paragraph (b) of the definition of short-term preferred share such that a share that is issued on June 30, 2000 and which is convertible into another share of that same corporation on or after June 30, 2005, will not be considered to be a short term preferred share since the share is not convertible at any time "within five years from the date of its issue".

(ii) If a corporation issues two classes of shares (class A & class B) that would not otherwise be term preferred shares or short-term preferred shares but for the fact that the class A shares are convertible only into class B shares & the class B shares are convertible only into class A shares would the Agency consider that both the class A and the class B shares would be term preferred shares and short term preferred shares or would the Agency consider that neither the class A or class B shares are term preferred shares or short-term preferred shares?

Our comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R3 dated December 30, 1996. Nevertheless, we offer the following general comments in connection with your request which we hope are of assistance to you.

A short term preferred share of a corporation under paragraph 248(1)(b) of the definition of short term preferred share (subject to certain exceptions):

b) is a share that is convertible or exchangeable at any time within 5 years after the date of its issue, unless

(i) it is convertible into or exchangeable for

(A) another share of the corporation or a corporation related to the corporation that, if issued, would not be a short-term preferred share,

(B) a right or warrant that, if exercised, would allow the person exercising it to acquire only a share of the corporation or a corporation related to the corporation that, if issued, would not be a short-term preferred share, or

(C) both a share described in clause (A) and a right or warrant described in clause (B), and

(ii) all the consideration receivable for the share on the conversion or exchange is the share described in clause (i)(A) or the right or warrant described in clause (i)(B) or both, as the case may be, and for the purposes of this subparagraph, where a taxpayer may become entitled on the conversion or exchange of a share to receive any particular consideration (other than consideration described in any of clauses (i)(A) to (C)) in lieu of a fraction of a share, the particular consideration shall be deemed not to be consideration unless it may reasonably be considered that the particular consideration was receivable as part of a series of transactions or events one of the main purposes of which was to avoid or limit the application of Part IV.1 or VI.1,

(our emphasis added)

Subsection 27(5) of the Interpretation Act (Canada) R.S., c. I-23, s.1., which you mention in your letter, provides that:

Where anything is to be done within a time after, from, of or before a specified day, the time does not include that day.

Thus, a share that is issued on June 30, 2000 and is convertible or exchangeable on any day that is earlier than July 1, 2005, for the purposes of the above definition would be convertible or exchangeable within 5 years from the date of issue. The Agency has not adopted a position that would extend its administrative practice as set out in paragraph 4 of IT-361R3 beyond its current application which is as stated in IT-361R3, solely for purposes of subparagraph 212(1)(b)(vii) of the Act.

With respect to your second query, it is our view that where a share of a particular class is convertible into a share of another class which in turn is convertible into the 1st class the conversion feature attached to the shares would generally not in and of itself mean that either share was a term preferred share.

Although we trust that our comments are of assistance to you, they do not constitute an advance income tax ruling and are, accordingly, not binding upon the Department with respect to any particular transaction.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch