26 April 1993 External T.I. 9232625 F - Taxable Preferred Shares

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Taxable Preferred Share ("TaxPS")

We are writing in response to your letter of October 30, 1992, in which you requested our comments with respect to the definition of a TaxPS, as described in subparagraph 248(1) of the Income Tax Act (the "Act"). We apologize for the delay in responding to your request.

In particular you have asked that we confirm that a class of shares, which would otherwise not be considered to be "preferred shares", that are entitled to receive a return of the stated capital attributable to that class in priority to shares of other classes would be not taxable preferred shares pursuant to clause 248(1)(b)(ii)(C) of the definition of TaxPS'.

It is your view that clause C should not apply to this type of share. Your reasoning is that while an ordering is made in respect of the return of capital, which places the subject shares in priority to other classes in respect of the return of the stated capital of the corporation, this does not give the holders of the shares ranking in priority an entitlement to a minimum return. You are of the opinion that in the event of liquidation the assets of the corporation remaining after payment of the creditors may be of a value less than the aggregate of the stated capital of that class and as such the class of shares would not be entitled to receive that stated capital.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where the particular transactions are completed, the enquiry should be addressed to the relevant District Taxation Office. The following comments are, therefore, of a general nature only.

Opinion

The preferred shares rules are intended to apply to shares that have debt-like characteristics, either with respect to income stream or return of capital.

Clause (b)(ii)(C) refers to the entitlement as "the amount that the shareholder is entitled to receive" on dissolution, liquidation or winding-up. The use of the word "entitled" does not import a guarantee concept. On liquidation, a shareholder is legally entitled to enforce a return of his proportionate share of whatever capital may be left after the payment of creditors. The directors have no discretion in the matter. We submit that one should interpret clause (b)(ii)(C) as referring to a minimum liquidation entitlement assuming that the corporation has sufficient net assets (after payment of creditors) to distribute an unlimited amount to its shareholders. As such it is our opinion that the shares described in your letter would be TaxPS'.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

Yours truly,

for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch