2001 Ruling 2001-0096713 - CREDIT UNION SHARES

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 CCRA.

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

Principal Issues: Whether the shares issued by the credit union are shares or debt obligations for purposes of the ITA including interest accrual rules.

Position: They are shares for all purposes of the ITA.

Reasons: The shares are equity shares under the XXXXXXXXXX Despite the fact that subsections 137(4.1) and (4.2) deems dividends paid on the shares to be interest, there is nothing in the ITA which changes their underlying nature as shares.

XXXXXXXXXX 								2001-009671

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re. XXXXXXXXXX

This is reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayer referred to above, none of the issues involved in the ruling request is:

(i) in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) the subject of a ruling previously issued by the Directorate.

In this letter, unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act"), and all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and their purposes is as follows:

Definitions

1. The following terms have the meanings specified:

a) "CCRA" means Canada Customs and Revenue Agency, and

b) "Xco" means XXXXXXXXXX.

Facts

2. Xco is a company incorporated under the XXXXXXXXXX and is a "credit union" pursuant to subsection 137(6) of the Act.

3. Xco's business number is XXXXXXXXXX, its Tax Services Office is XXXXXXXXXX, and it files its income tax returns at the XXXXXXXXXX Taxation Centre.

4. XXXXXXXXXX.

5. As of XXXXXXXXXX, Xco has XXXXXXXXXX classes of equity shares, which are redeemable XXXXXXXXXX under normal circumstances:

a) The Class XXXXXXXXXX shares are membership shares and are required to be held by all members. They are the only class of shares that carry the right to vote at a general meeting of members and are retractable at par at the members' request upon cessation of membership.

b) XXXXXXXXXX.

Proposed Transactions

6. Xco intends to issue two new classes of shares, XXXXXXXXXX shares, which will only be offered to members of Xco and will not be listed on a prescribed stock exchange.

7. XXXXXXXXXX shares meet the criteria of "primary capital" as described in XXXXXXXXXX, and will carry the following rights and restrictions:

a) The shares will have a par value of $ XXXXXXXXXX per share;

b) Any entitlement to dividends will be non-cumulative. The shares will not have voting rights, except in respect of matters which affect the rights attributable to the XXXXXXXXXX shares;

c) The shares will be redeemable solely at Xco's discretion for an amount equal to the shares' par value, plus any declared, but unpaid dividends. It is Xco's intention, but not obligation, to offer to redeem up to XXXXXXXXXX% of the outstanding XXXXXXXXXX shares annually;

d) The XXXXXXXXXX shares are equity shares and will take priority over member shares, rank equally with existing equity shares and rank behind the proposed XXXXXXXXXX shares upon liquidation or wind up of Xco; and
e) Any dividends may be payable in cash or in kind.

8. Xco intends to declare annual dividends on the XXXXXXXXXX shares at a rate expected to be equivalent to current interest rates being offered on similar investments. This rate, or another chosen depending upon market conditions at the time of offer, will be a commercially marketable rate.

9. Dividends declared on the XXXXXXXXXX shares will be paid on the earlier of the date of redemption, and a date to be fixed when the shares are issued. Xco expects such date to be approximately 10 years from the date of issuance of the shares.

10. XXXXXXXXXX shares meet the criteria of "secondary capital" as described in XXXXXXXXXX and will carry the following rights and restrictions:

a) The shares will have a par value of $ XXXXXXXXXX per share;

b) Any entitlement to dividends will be cumulative with a stated dividend rate established at the time of issuance. The shares will not have voting rights, except in respect of matters which affect the rights attributable to the XXXXXXXXXX shares;

c) The shares will not be redeemable by Xco or retractable by the member, except in the event of any unforeseen occurrences including, but not necessarily limited to the death of a member or extreme economic hardship in cases where a member properly establishes such a claim. In the case of an unforeseen occurrence, the shares will be redeemable for an amount equal to the shares' par value, plus any declared, but unpaid dividends.

d) The XXXXXXXXXX shares are equity shares and will take priority over member shares and all other equity shares upon liquidation or wind up of Xco; and

e) The dividends will be payable in cash or in kind.

11. Xco intends to declare annual dividends on the XXXXXXXXXX shares at a rate expected to be equivalent to current interest rates being offered on similar investments. This rate, or another chosen depending upon market conditions at the time of offer, will be a commercially marketable rate.

12. Dividends declared on the XXXXXXXXXX shares will be paid on the earlier of the date of redemption and a date to be fixed when the shares are issued. Xco expects such dates to be approximately on the XXXXXXXXXX anniversaries from the date of issuance of the shares.

Purpose of the Proposed Transactions

13. Xco wishes to expand its equity base in order to continue expanding its various loan portfolios.

Rulings

Provided that the above statements of fact are complete and accurate and that the proposed transactions are undertaken as described, the following rulings are provided:

A. The XXXXXXXXXX shares offered by Xco are "shares" pursuant to subsection 248(1) and are not debt obligations;

B. Subsections 12(3) and 12(4) will not apply in respect of dividends paid or payable on the XXXXXXXXXX shares;

C. The XXXXXXXXXX shares are qualified investments for RRSP purposes under subsection 146(1) and paragraph 4900(1)(f) of the Income Tax Regulations;

D. Part VI.1 of the Act will not apply upon declaration or payment of the XXXXXXXXXX dividends; and

E. Subsection 245(2) will not be applicable as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided that the Agreement is executed and becomes effective before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
Manager
Financial Institutions Team
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch