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.
Principal Issues: whether CICA Handbook governs classification of preferred shares and dividends paid on those shares for income tax purposes
Reasons: the legal form determines the classification for income tax purposes, unless there is a contrary provision in the ITA
Denise Dalphy, LL.B.
March 30, 2004 (613) 941-1722
We are writing in reply to your e-mail of January 15, 2004 wherein you requested our views on the income tax treatment of dividends paid on certain preferred shares where the CICA Handbook requires those shares to be reclassified as debt and provides that the amount of dividends paid on those shares may be deducted as interest or financing costs.
Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are seriously proposed in the near future and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. In particular it would appear, based on the details provided in your submission, that your transactions are partially completed or completed, and that your relevant Tax Services Office should address these issues. Notwithstanding the foregoing, we are providing the following comments.
It is the Canada Revenue Agency's (the "CRA") position that the legal nature of a financial instrument governs its classification for income tax purposes irrespective of its accounting treatment (see, for example, the decision of the Supreme Court of Canada in Shell Canada Ltd. v. The Queen (99 DTC 5669)). Accordingly, unless the Income Tax Act provides that the payment of dividends is to be treated differently from their legal form (e.g., certain term preferred shares), payments of dividends are not "interest" and are not deductible for income tax purposes.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the CRA. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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