1 September 1994 External T.I. 9413775 - ELIGIBLE PROPERTY & CUM DIVIDENDS

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:- WOULD CUMULATIVE DIVIDEND ON SHARE QUALIFY AS ELIGIBLE PROPERTY?

Position TAKEN:- cumulative dividend represents a right associated with a share and the share is eligible property

Reasons FOR POSITION TAKEN: - cumulative dividend not a corporate debt until dividend declared

				941377

XXXXXXXXXX		M.P. Sarazin

Attention: XXXXXXXXXX

September 1, 1994

Dear Sirs:

Re: Transfer of Shares with Unpaid Cumulative Dividends

This is in reply to your letter dated May 20, 1994 wherein you requested our views on whether a preferred share with accrued cumulative dividends could be transferred by an individual to a holding corporation under subsection 85(1) of the Income Tax Act or exchanged for other shares of the corporation pursuant to a reorganization of capital described in subsection 86(1) of the Act.

You are of the view that the accrued cumulative dividend would qualify as eligible property, within the meaning assigned by subsection 85(1.1) of the Act, and it could be transferred to a corporation under subsection 85(1) of the Act. In addition, the preferred share could be exchanged on a tax-deferred basis, pursuant to subsection 86(1) of the Act, for a share from a different class of the corporation's capital in the course of a reorganization of its capital. In either case, you are uncertain as to how and when the accrued cumulative dividend would be included in the shareholder's income for purposes of the Act.

Comments

Unless otherwise stated, all references to a statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended, consolidated to June 10, 1993 (the "Act"). Also, for the purposes of our comments, we have assumed that the shares represent capital property, within the meaning of paragraph 54(b) of the Act, to the taxpayer.

We are of the view that each share of a corporation represents a bundle of rights, privileges, restrictions and conditions attached to the share under the articles of incorporation of the issuing corporation. The right to accrued cumulative dividends would be just one of the bundle of rights that would be attached to a particular share. Consequently, it is the share and not the right to a cumulative dividend associated with the share that would be considered property for purposes of the Act. When a share is transferred to a holding corporation under subsection 85(1) of the Act or exchanged for another share in the course of a reorganization of a corporation's capital under subsection 86(1) of the Act, it is the bundle of rights that make up the share, including the right to any accrued cumulative dividends, that is being transferred or exchanged.

Generally, taxable dividends are only included in income when such dividends are paid by the corporation or deemed to have been paid by the corporation under the various provisions of the Act. It is a question of fact whether a deemed dividend would result from a transfer under subsection 85(1) of the Act or an exchange in the course of a reorganization of the corporation's share capital under subsection 86(1) of the Act. The transfer or exchange of shares with a right to accrued cumulative dividends would not, in and by itself, result in the accrued cumulative dividends being paid or deemed to have been paid by the corporation.

For example, a person owns a Class A preferred share which is redeemable for $100 and entitled to a 5% cumulative dividend with three years of accrued cumulative dividends ($15) remaining unpaid. The Class A preferred share has an adjusted cost base and paid-up capital of $100. The corporation reorganizes its capital and the Class A preferred share is exchanged for a Class B preferred share which is redeemable for $115 and entitled to a 5% cumulative dividend and the purpose of the reorganization is not to benefit another taxpayer. Under the provisions of subsection 86(1) of the Act, the person will be deemed to have disposed of the Class A preferred share for $100 and will be deemed to have acquired the Class B preferred share for $100. The Class B share will also have a paid-up capital of $100. When the Class B preferred share is redeemed by the corporation, the person will be deemed to have received a taxable dividend of $15 and it is at this time that the accrued cumulative dividend will be taxed.

Where the purpose of the transfer or exchange is to benefit another person, for example, by allowing the corporation to pay dividends on another class of shares prior to the time that it otherwise could have paid such dividends or by some other means then one of the anti-avoidance provisions such as subsections 56(2), 86(2) or 245(2) may be applied by the Department.

These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch