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 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: The shares are equity shares under the relevant provincial legislation. Notwithstanding that subsections 137(4.1) and (4.2) deem dividends paid or payable on the shares to be interest and not to be dividends, there is nothing in the Act which changes their underlying nature as shares.
XXXXXXXXXX 2004-009871
XXXXXXXXXX, 2004
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:
i. is in an earlier return of the taxpayer or a related person;
ii. is being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayer or a related person;
iii. is under objection by the taxpayer or a related person;
iv. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
v. is the subject of a ruling previously issued to the taxpayer by the Directorate other than those referred to in 6 below.
Unless otherwise stated, all references to a statute are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the relevant definitions, facts, proposed transactions and their purposes is set out below.
DEFINITIONS
a) "ACO" means XXXXXXXXXX,
b) "Credit Union Act" means the XXXXXXXXXX,
c) "CCRA" means Canada Customs and Revenue Agency,
d) "Regulation" means the XXXXXXXXXX, and
e) "RRSP" means registered retirement savings plan as defined in subsection 146(1).
FACTS
1) ACO is a company incorporated under the Credit Union Act and is a "credit union" within the meaning of subsection 137(6). It files its tax returns at the XXXXXXXXXX Taxation Centre and its tax services office is the XXXXXXXXXX TSO.
2) ACO has approximately XXXXXXXXXX members and approximately $XXXXXXXXXX in total assets under administration as at XXXXXXXXXX, being the last fiscal year for which audited financial information is available.
3) As of XXXXXXXXXX, ACO has issued XXXXXXXXXX classes of equity shares with a par value of $XXXXXXXXXX per share.
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. They are redeemable at par and are retractable at par at the members' request upon cessation of membership.
5) XXXXXXXXXX.
6) XXXXXXXXXX shares have been sold to members in XXXXXXXXXX previous tranches. The XXXXXXXXXX tranche was issued on XXXXXXXXXX following the receipt of advance income tax ruling dated XXXXXXXXXX, 2001 (Document No. 2001-009671) and the XXXXXXXXXX tranche was issued on XXXXXXXXXX following the receipt of advance income tax ruling dated XXXXXXXXXX, 2002 (Document No. 2002-016137). The XXXXXXXXXX tranches were issued on XXXXXXXXXX, respectively.
7) You advise that the XXXXXXXXXX previous tranches of XXXXXXXXXX shares meet the criteria of "primary capital" as described in XXXXXXXXXX of the Regulation, 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. 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 ACO's discretion for an amount equal to the shares' par value plus any declared but unpaid dividends. You advise that there have been no redemptions of the XXXXXXXXXX shares to date;
d) The XXXXXXXXXX shares are equity shares and take priority over membership shares, rank equally with existing XXXXXXXXXX shares, and rank behind the XXXXXXXXXX shares upon liquidation or wind up of ACO; and
e) Any dividends are payable in cash or in kind.
8) ACO intends to declare annual dividends on the XXXXXXXXXX shares at a rate of XXXXXXXXXX%. ACO declared an annual dividend of XXXXXXXXXX% on each of the XXXXXXXXXX tranches. ACO is proposing to declare an annual dividend of XXXXXXXXXX% on the XXXXXXXXXX tranches.
9) Dividends declared on the XXXXXXXXXX shares are paid on the earlier of the date of redemption and a fixed date that is approximately XXXXXXXXXX years from the date of issuance of the shares. You advise that there have been no payments of dividends on the XXXXXXXXXX shares.
10) You advise that the XXXXXXXXXX previous tranches of XXXXXXXXXX shares meet the criteria of "secondary capital" as described in XXXXXXXXXX of the Regulation, 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 ACO 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 membership shares and all other equity shares upon liquidation or wind up of ACO; and
e) Any dividends are payable in cash or in kind.
11) Dividends declared on the XXXXXXXXXX shares are paid on the earlier of the date of redemption and a date fixed when the shares were issued. ACO 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. You advise that there have been no redemptions of the XXXXXXXXXX shares to date.
12) The dividend rates fixed for each of the XXXXXXXXXX tranches of XXXXXXXXXX shares were as follows:
XXXXXXXXXX.
PROPOSED TRANSACTIONS
13) ACO intends to offer for sale a XXXXXXXXXX tranche of XXXXXXXXXX shares and a new class of shares, XXXXXXXXXX shares. The share offering will be restricted to members of ACO and will not be listed on a prescribed stock exchange.
14) You advise that the XXXXXXXXXX tranche of XXXXXXXXXX shares will be equity shares within the meaning of the Credit Union Act and will meet the criteria of "primary capital" as described in XXXXXXXXXX of the Regulation. The XXXXXXXXXX tranche of XXXXXXXXXX shares 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 ACO's discretion for an amount equal to the shares' par value plus any declared but unpaid dividends;
d) The XXXXXXXXXX shares will take priority over membership shares, rank equally with XXXXXXXXXX shares, and rank behind XXXXXXXXXX shares and the proposed XXXXXXXXXX shares upon liquidation or wind up of ACO; and
e) Any dividends are payable in cash or in kind.
15) ACO intends to declare annual dividends on the XXXXXXXXXX tranche of XXXXXXXXXX shares at a rate determined with reference to rates that are available on similar investments at the time of offer. This rate will be a commercially marketable rate.
16) You advise that the proposed XXXXXXXXXX shares will be equity shares within the meaning of the Credit Union Act and will meet the criteria of "secondary capital" as described in XXXXXXXXXX of the Regulation. The proposed XXXXXXXXXX shares 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 and 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 ACO 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 will take priority over membership shares and XXXXXXXXXX shares, and rank equally with the XXXXXXXXXX shares upon liquidation or wind up of ACO; and
e) Any dividends are payable in cash or in kind.
17) ACO expects to issue XXXXXXXXXX separate types of XXXXXXXXXX shares. These types of shares will be distinguished from each other only by their respective fixed 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.
18) The dividend rate on the XXXXXXXXXX shares is expected to be a rate comparable to rates currently being offered on similar investments. The rates payable are expected to be higher for the types of XXXXXXXXXX shares with later redemption dates. The dividend rates for the XXXXXXXXXX shares are expected to be approximately XXXXXXXXXX, respectively.
19) No new XXXXXXXXXX shares will be issued to the membership of ACO. However, holders of existing XXXXXXXXXX shares will retain all of their original rights and privileges until their shares are eventually redeemed.
PURPOSE OF THE PROPOSED TRANSACTIONS
20) ACO wishes to expand its equity base in order to continue expanding its various loan portfolios.
RULINGS GIVEN
Provided 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 that:
A. The XXXXXXXXXX tranche of XXXXXXXXXX shares, as described in 13 to 18 above, to be offered by ACO 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 in accordance with 15 and 18 above on the XXXXXXXXXX tranche of XXXXXXXXXX shares, respectively.
C. The XXXXXXXXXX tranche of XXXXXXXXXX shares, as described in 13 to 18 above, are qualified investments for RRSP purposes under subsection 146(1) and paragraph 4900(1)(f) of the Income Tax Regulations.
D. By virtue of subsections 137(4.1) and (4.2), which deem an amount paid or payable by a credit union to a member in respect of a share of the credit union to be paid or payable as interest and not as a dividend, Part VI.1 will not apply upon declaration or payment of the XXXXXXXXXX tranche of XXXXXXXXXX share dividends or XXXXXXXXXX share 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 out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CCRA provided that the proposed issue of the XXXXXXXXXX tranche of XXXXXXXXXX shares are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
Manager
Financial Institutions Team
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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