18 October 1989 Ruling 58733 F - Prescribed Shares for Purposes of 110(1)(d)

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.

October 18, 1989

Dear Sirs:

Re:  Paragraph 110(1)(d) of the Income Tax Act (the "Act") and Section 6204 of the Income Tax Regulations ("ITR")

We are writing in response to your letter of September 19, 1989 wherein you requested our opinion on whether the shares described below meet the requirement specified in subparagraph 6204(1)(a)(i) of the ITR.  The shares described in your letter are non-voting shares which are otherwise essentially the same as common shares except that, for marketing purposes, the shares provide for a minimum cumulative preferential dividend (e.g., $.01 per share) so that they are "legal for life" and can be considered as qualified investments for insurance companies, pension funds, etc.  The terms of the shares are such that there is full participation of earnings after the common shares have received equivalent dividends.  Your letter also indicated that as a practical matter, the dividends paid in any year on the shares normally substantially exceed the nominal preferential dividend so that, in fact, there is no distinction between the dividends received on the different share classes.

Pursuant to subparagraph 6204(1)(a)(i) of the ITR, one of the conditions that must be met before a share would be considered as a prescribed share is that under the terms or conditions of the share or any agreement in respect of the share or its issue, the amount of the dividends that the corporation may declare or pay on the share must not be limited to a maximum amount or fixed at a minimum amount by way of a formula or otherwise.

In view of the above and in view of the fact that the dividends are cumulative, notwithstanding that the dividend entitlement is merely $.01 per share, we are of the opinion that the shares are not prescribed shares within the meaning assigned by section 6204 of the ITR.

Also, subparagraph 6204(1)(a)(ii) of the ITR provides that the amount that the holder of the share is entitled to receive on the share on the dissolution, liquidation or winding-up of the corporation must not be limited to a maximum amount or fixed at a minimum amount by way of a formula or otherwise.  In the event that the holders of the non-voting shares would be entitled on the dissolution of the company to receive at least the amount of declared but unpaid cumulative dividends on the shares, it is our view that the "liquidation entitlement", as the term is used in subparagraph 6204(1)(a)(ii) of the ITR, would be considered fixed at a minimum amount.

We trust these comments will be of assistance.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch