24 July 1994 External T.I. 9407075 - 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Sale agreement from public corp to acquire shares in 5 month of a ccpc from 5 corporate shareholders each with a 20% interest. Shareholders plan to pay dividend up to safe income. Are the shares taxable preferred shares ?

Position TAKEN:

Yes - Depending on the terms of the shares.

Reasons FOR POSITION TAKEN:

Depending on the terms and conditions there may be a limiting amount and there is no substantial interest. Acquirer is a specified person. Sale agreement for purchase of shares not within 60 days.

XXXXXXXXXX 940707

Attention: XXXXXXXXXX

July 25, 1994

Dear Sirs:

Re: Taxable Preferred Share "TxPS")

This is in reply to your letter of March 14, 1994 concerning a situation where five corporate shareholders each owning 20% of a Canadian-controlled private corporation's common shares enter into a purchase and sale agreement with an arm's length public corporation under which the purchaser agrees to acquire all the issued and outstanding shares of the corporation in 5 months time. The corporation intends to pay dividends to the shareholder immediately prior to the Closing Date in an amount equal to the "safe income". You ask for our opinion as to whether by virtue of the sale agreement, the common shares of the corporation are taxable preferred shares as defined in subsection 248(1)of the Act.

The situations that are described appear to involve a series of actual proposed transactions. It is not our practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R2. Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R2 for the procedure to be followed. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

Our Comments

In our view, a sale agreement which fixes the purchase price of the shares could invoke subparagraph 248(1)(b)(iv) of the TxPS definition. Further, a sale agreement that fixes the dividend entitlement by formula or otherwise may cause subparagraph 248(1) (b)(i) or b(ii) of the definition to apply with the result that the shares would be taxable preferred shares. The exception found in subparagraph (f)(i) of the TxPS definition would not apply if the closing date is beyond the sixty days provided therein, however the exception in subparagraph (f)(ii) may apply depending on the facts of a particular situation. Since such a determination is based on particular facts, only upon examining the terms and conditions of the shares and the relevant purchase and sale agreements, would we be able to determine whether or not the shares are TxPS and whether or not Part VI.1 applies.

The above comments are only general expressions of opinion and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

We trust our comments will be of assistance to you

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch