30 May 1991 External T.I. 9013245 F - Interpretation of the Definition of "Taxable Preferred Share"

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.

5-901324

Dear Sirs:

Re:  Interpretation of the Definition of "Taxable Preferred Share" in Subsection 248(1) of the Income Tax Act (the "Act")

This is in reply to your letter dated June 13, 1990, whereby you requested our opinion concerning our interpretation of paragraph (b) of the definition of "taxable preferred share" in subsection 248(1) of the Act, in a situation which you described as follows:

24(1)

You requested our opinion as to whether a 24(1) could be considered to be a "taxable preferred share" by virtue of clauses (b)(i)(A) or (C) of the definition of that expression in subsection 248(1), and whether the phrase "it may reasonably be considered having regard to all the circumstances" in that definition provides any latitude in the applicability of the dividend entitlement clauses under consideration.

Our Comments

It appears that the above facts relate to a specific proposed transaction. Assurance as to the tax consequences of specific proposed transactions will only be given in response to a written request for an advance income tax ruling.  The procedures for requesting advance income tax rulings are set out in Information Circular 70-6R2.  We are, however, providing you with the following general comments in relation to the definition of "taxable preferred share" in subsection 248(1).

Subparagraph (b)(i) of the definition of "taxable preferred share" provides that a determination must be made of whether "it may reasonably be considered, having regard to all the circumstances" that the amount of the dividend that may be declared or paid on a share is fixed, limited to a maximum or established to be not less than a minimum with a preferential dividend entitlement.

In our view, that wording allows us to consider facts outside of the terms and conditions of the share but related to the declaration or payment of dividends, in order to determine whether the dividend meets any of the aforementioned criteria.  However, it is our opinion that the test is limited to the circumstances surrounding the declaration or payment of a dividend on a particular share and would not allow us to consider the intent of the legislation and the purpose for which the share was issued in order to ignore the words of the definition where they are clear and unambiguous.

It is our view that a share is a "taxable preferred share", by virtue of clause (b)(i)(C) of the definition, if the share is entitled to a minimum dividend (albeit nominal) and enjoys a preference in the payment of that minimum dividend, even though increased amounts could be declared as dividends on the share and, in regard to these additional amounts, no preference would exist over another class of shares.

The foregoing expressions of opinion are given in accordance with the practice referred to in paragraph 24 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch