1 May 1996 External T.I. 9609095 - DEFINITION OF "LIABILITIES" IN SUBSECTION 130.1(9)

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:

Whether redeemable, retractable preferred shares issued by a MIC are "liabilities" as defined in subsection 130.1(9) in light of new section 3860 of the CICA handbook.

Position:

The legal form of the financial instrument would generally determine its tax treatment.

Reasons:

Tax Executive Institute - November 1995 Revenue Canada Round Table (9530990)

		5-960909
XXXXXXXXXX					J. Leigh

Attention: XXXXXXXXXX

May 1, 1996

Dear Sirs:

Re: Definition of "Liabilities" in Subsection 130.1(9)

This is in reply to your letter of February 26, 1996 in which you requested a technical interpretation of the term "liabilities" as defined in subsection 130.1(9) of the Income Tax Act (the "Act") in light of new section 3860, Financial Instruments - Disclosure and Presentation, of the CICA handbook. Specifically, you wish to know whether redeemable, retractable preferred shares constitute liabilities for the purposes of section 130.1 of the Act.

Handbook section 3860 requires the issuer of a financial instrument to initially classify the instrument, or its component parts, as a liability or as equity in accordance with the substance of the contractual arrangement and the definitions of a financial liability and an equity instrument set out in that section. Pursuant to paragraph 22 of handbook section 3860, a preferred share that is mandatorily redeemable for a fixed or determinable amount at a fixed or determinable future date, or is redeemable at the option of the holder at or after a particular date for a fixed or determinable amount is a financial liability and is to be classified as such on the issuer's balance sheet.

We would advise that the classification of a particular financial instrument as debt or equity for accounting purposes is generally not determinative of its treatment for income tax purposes. Rather, it is the legal form of the particular financial instrument, not its economic substance, that usually will determine whether it is treated as debt or equity for the purposes of the Act. Accordingly, it is our view that redeemable, retractable preferred shares of mortgage investment corporations normally would not be "liabilities" as defined in subsection 130.1(9) of the Act, regardless of whether any intention to redeem or retract the shares exists.

As explained in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the above comments do not constitute an advance income tax ruling and are not binding on the Department. We trust that our comments are of assistance to you.

Yours truly,

Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch