11 January 2012 External T.I. 2010-0377991E5 - MIC - paragraph 130.1(6)(e)

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 a corporation with multiple classes of common shares each with different dividend entitlements and no preferred shares would be disqualified from meeting the definition of a mortgage investment corporation in subsection 130.1(6).

Position: No.

Reasons: The existence of multiple classes of shares each with different dividend entitlements would not be contrary to paragraph 130.1(6)(e). This paragraph does not prohibit either multiple classes of common shares or different dividend entitlements among common shareholders. Rather, it provides for a specific ordering in the payment of dividends. Where the corporation has no preferred shares, it is not precluded from qualifying as a MIC to the extent it otherwise meets the MIC definition.

XXXXXXXXXX 			2010-037799

January 11, 2012

Dear XXXXXXXXXX :

Re: Mortgage Investment Corporation

We are writing in response to your letter dated August 10, 2010 regarding the definition of a mortgage investment corporation ("MIC") in subsection 130.1(6) of the Income Tax Act ("the Act").

You have asked for our views as to whether the existence of two classes of common shares each with different dividend entitlements would preclude a corporation from meeting the definition of a MIC if only one class of common shareholders would be entitled to bonus dividends to be paid from time to time. You advise that the corporation would have no preferred shares and the two classes of common shares would be identical in all respects except for dividend entitlement. In your view, both classes of shares would meet the definition of a "common share" in subsection 248(1) of the Act. It is also your view that paragraph 130.1(6)(e) of the Act has no application to the situation described in your letter.

Our Comments

The term "common share" is defined in subsection 248(1) of the Act as a share whose holder is not precluded on the reduction or redemption of the share from participating in the assets of the corporation beyond the amount paid up on that share plus a fixed premium and a defined rate of dividend. A "preferred share" is defined in subsection 248(1) of the Act as a share other than a common share. Therefore, a review of the rights of the shareholder would be required in order to determine whether a particular share qualifies as a common share or a preferred share for the purposes of the Act.

It is a question of fact whether a particular corporation qualifies as a MIC as defined in subsection 130.1(6) of the Act. Paragraph 130.1(6)(e) of the Act provides for a specific ordering in the payment of dividends when the corporation has preferred shareholders. Dividend entitlements must first be paid to preferred shareholders, then a like amount must be paid to the common shareholders, and finally any further dividends must be paid pari passu to all shareholders regardless of class. Therefore, in a situation where a corporation has no preferred shareholders, the fact that the corporation may have two classes of common shares with different dividend entitlements would not, in and of itself, preclude the corporation from qualifying as a MIC.

While we trust that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the Canada Revenue Agency in respect of any particular situation.

Yours truly,

Jenie Leigh
for Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch