17 April 1996 External T.I. 9610645 - ALPHABET SHARES-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:

Alphabet Shares - Are they taxable preferred shares ?

Also - if a separate subsidiary is incorporated to carry on separate lines of business, will the shares of the subsidiary be considered to have been acquired in the "ordinary course of business" for puposes of 112(2.1) ?

Position:

Question of fact - yes if dividend entitlement is limited by virtue of share terms or agreement relating to shares. See file #940103 for analysis.

Question of fact, but generally no - see 1984 Round Table - Question #62

Reasons:

Previous opinions - See file # 940103

		961064
XXXXXXXXXX	J.P. Dunn

Attention: XXXXXXXXXX

April 17, 1996

Dear Sirs:

Re: Taxable Preferred Shares

We are writing in response to your correspondence of March 12, 1996 wherein you had requested the views of the Department concerning certain aspects of the definition of "taxable preferred shares" as that term is defined in subsection 248(1) of the Income Tax Act (the "Act"). As you had noted, the definition of a "taxable preferred share" includes, inter alia, a share upon which the dividend declared or paid is "fixed" by way of formula or otherwise. You have enquired whether such a condition would be applicable in the case in which the dividends payable on a particular class of common shares of a corporation are determined by reference to the profits attributable to a specific business division of the corporation. Unfortunately, we are unable to provide a definitive response as the particular method utilised by the corporation to determine the dividends payable on the share would be determinative of the issue. More specifically, the resolution of the question would depend on whether the dividends payable were fixed, limited to a maximum or established to be not less than a minimum by reason of the terms or conditions of the share or any agreement in respect of the share or its issue as these terms are used in the context of the definition of "taxable preferred share" in subsection 248(1) of the Act.

You had also requested the Department's views regarding a corporation which is a "specified financial institution", within the meaning of that term in subsection 248(1) of the Act, which carries on, each through a separate subsidiary corporation, several business ventures. More particularly, your query was whether the shares of those subsidiary corporations would be considered to be acquired by the specified financial institution "in the ordinary course of business" as that term is used in subsection 112(2.1) of the Act.

As the determination of whether such shares would be considered to have been acquired "in the ordinary course of business" would require an examination of the facts and circumstances surrounding the acquisition, we are not able to provide a determinative response to a hypothetical fact situation. We would note, however, that, in response to question number 62 at the Revenue Canada Round Table of the 1984 Conference of the Canadian Tax Foundation, the Department provided a list of several factors which would be considered in determining whether a share would be considered to be a term preferred share and, among the factors which would lead to a contrary conclusion, was "whether the funds involved represent the initial capitalization of a new subsidiary or the provision of additional operating capital to a subsidiary, both of which would normally indicate permanent capitalization". Although this statement may be applicable to the situation contemplated in your letter, we would again emphasize that any determination would only be made subsequent to an examination of all the facts of any particular circumstance.

While we trust that our comments are of assistance to you, we would advise that they do not constitute an advance income tax ruling and are, accordingly, not binding upon the Department with respect to any particular transaction.

Yours truly,

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