2002 Ruling 2002-0161373 - 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 								2002-016137

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

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

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

The following terms have the meanings specified:

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

b) "Xco." means the XXXXXXXXXX.

Facts

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

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

3. As of XXXXXXXXXX, Xco. has issued XXXXXXXXXX classes of equity shares, which are redeemable at par value of $XXXXXXXXXX under normal circumstances.

4. The 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.

5. XXXXXXXXXX.

6. The first tranche of XXXXXXXXXX shares were issued in XXXXXXXXXX following an advance income tax ruling granted to Xco. dated XXXXXXXXXX, 2001 (Document no. 2001-009671). These shares have only been offered to members of Xco. and have not been listed on a prescribed stock exchange.

7. The first tranche of XXXXXXXXXX shares met the criteria of "primary capital" as described in XXXXXXXXXX and carry the following rights and restrictions:

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

b) any entitlement to dividends is non-cumulative and the shares do not have voting rights, except in respect of matters which affect the rights attributable to the XXXXXXXXXX shares;

c) the shares are 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 take priority over member shares, rank equally with existing equity shares, and rank behind the XXXXXXXXXX shares upon liquidation or wind up of Xco.; and

e) any dividends are 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 first tranche of XXXXXXXXXX shares will be paid on the earlier of the date of redemption and XXXXXXXXXX, approximately XXXXXXXXXX years from the date of issuance of the shares.

10. The first tranche of XXXXXXXXXX shares met the criteria of "secondary capital" as described in XXXXXXXXXX and carry the following rights and restrictions:

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

b) any entitlement to dividends is cumulative with a stated dividend rate established at the time of issuance and the shares do not have voting rights, except in respect of matters which affect the rights attributable to the XXXXXXXXXX shares;

c) the shares are not 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 are redeemable for an amount equal to the shares' par value, plus any declared, but unpaid dividends.

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

e) the dividends are payable in cash or in kind.

11. Xco. intends to declare annual dividends on the first tranche of XXXXXXXXXX shares at a commercially marketable rate. Dividends declared on the first tranche of XXXXXXXXXX shares will be paid on the earlier of the date of redemption and a date fixed when the shares were issued. Xco. issued XXXXXXXXXX separate types of XXXXXXXXXX shares, distinguished from each other only by their respective redemption dates and the rates of return attached to the shares. The redemption dates were fixed at the XXXXXXXXXX anniversaries of the date of issuance of the shares. The dividend rates fixed for the XXXXXXXXXX shares were XXXXXXXXXX respectively.

Proposed Transactions

12. Xco. intends to offer a second tranche of XXXXXXXXXX shares to its members. The terms and conditions of the second tranche will be identical in all respects to the first tranche, as described in paragraphs 6 to 11 above, except with respect to their redemption dates and the rates of return attached to the shares.

13. Dividends declared annually on the second tranche of XXXXXXXXXX shares are to 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 XXXXXXXXXX years from the date of issuance of the shares.

14. Dividends declared on the second tranche of 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 to issue XXXXXXXXXX separate types of XXXXXXXXXX shares, distinguished from each other only by their respective redemption dates and the rates of return attached to the shares. The redemption dates are expected to be fixed at the XXXXXXXXXX anniversaries of the date of issuance of the shares. The dividend rates for the XXXXXXXXXX shares are expected be approximately XXXXXXXXXX respectively.

Purpose of the Proposed Transactions

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

Other Information

16. Subsequent to the proposed second tranche, X Co. intends to offer additional tranches of XXXXXXXXXX shares to its membership once annually beginning in XXXXXXXXXX

Rulings

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 Rulings:

A. the second tranche of XXXXXXXXXX shares, as described in paragraphs 12 to 14 above, to be 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 in accordance with paragraphs 13 and 14 above on the second tranche of XXXXXXXXXX shares;

C. the second tranche of XXXXXXXXXX shares, as described in paragraphs 12 to 14 above, 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 second tranche XXXXXXXXXX share 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 out in Information Circular 70-6R5 and are binding on the CCRA provided that the proposed transactions are completed on or before XXXXXXXXXX.

Yours truly,

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