2002 Ruling 2002-0122593 - 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 shares of a credit union are shares or debt obligations for purposes of the Act including the interest accrual rules.

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

Reasons: 137(4.1)

XXXXXXXXXX                                      2002-012259

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer.

You advise 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 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 previous ruling 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 the following terms have the meanings specified:

a) "A Co" means XXXXXXXXXX, and

b) "CCRA" means Canada Customs and Revenue Agency.

Our understanding of the facts, proposed transactions and their purposes is set out below.

FACTS

1. A Co is a company incorporated under the XXXXXXXXXX and is a "credit union" within the meaning of subsection 137(6).

2. A Co files its tax returns at the XXXXXXXXXX Taxation Centre and its Tax Services Office is XXXXXXXXXX.

3. XXXXXXXXXX,

4. XXXXXXXXXX,

5. XXXXXXXXXX,

6. XXXXXXXXXX,

PROPOSED TRANSACTIONS

7. A Co has authorized and intends to issue a new class of shares, XXXXXXXXXX shares, which will only be offered to members of A Co and will not be listed on a prescribed stock exchange.

8. XXXXXXXXXX shares meet the criteria of "secondary capital" as described in the 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 A Co or retractable by the member prior to the stated date of redemption 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 A Co; and

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

9. A Co intends to declare annual dividends on the XXXXXXXXXX shares at a rate expected to be equivalent to current 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.

10. Dividends declared on the XXXXXXXXXX shares will be paid on the earlier of the date of retraction and a date of redemption to be fixed when the shares are issued. A Co anticipates that the date of redemption will be on the XXXXXXXXXX anniversary from the date of issuance.

PURPOSE OF THE PROPOSED TRANSACTIONS

11. A Co wishes to expand its equity base in order to continue expanding its various loan portfolios.

OTHER INFORMATION

12. While you indicate that it is not relevant to the specific rulings requested, you have advised that A Co, subject to obtaining the requisite approvals, will XXXXXXXXXX. The XXXXXXXXXX is expected to become effective at the end of XXXXXXXXXX and will not affect the shares that are the subject of this ruling request.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, we confirm the following:

A. The XXXXXXXXXX shares offered by A Co 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 the 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.

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 CCRA provided that the proposed transactions are completed on or before XXXXXXXXXX.

Yours truly,

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