23 March 1998 External T.I. 9805915 - MIC'S - MULTIPLE CLASSES OF 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:

Whether the existence of multiple classes of shares (preferred or common) each with different dividend entitlements would be contrary to paragraph 130.1(6)(e). NOTE: The taxpayer also advised that, for tax purposes, the shares would all be preferred shares as defined in subsection 248(1). We did not examine this issue.

Position TAKEN:

No provided that all shareholders have the right to participate pari passu in the payment of dividends beyond (1) their dividend entitlements, in the case of preferred shareholders, and (2) a reasonably similar or like amount to common shareholders after taking the different class features into consideration.

Reasons FOR POSITION TAKEN:

The legislation (130.1(6)(e) does not prohibit either multiple classes of preferred shares or different dividend entitlements among preferred shareholders but imposes a condition that common shares receive a dividend in a like amount to that of preferred shareholders.

XXXXXXXXXX 980591
G. J. Donell

Attention: XXXXXXXXXX

March 23, 1998

Dear Sirs:

Re: Paragraph 130.1(6)(e) - Mortgage Investment Corporation

This is in reply to your fax of March 10, 1998 in which you have asked for our views as to whether multiple classes of preferred or common shares is acceptable for purposes of paragraph 130.1(6)(e) of the Income Tax Act (the “Act”).

You indicate that it is possible for a corporation not to have any authorized or issued common shares. If this is the case such that all the issued classes of shares of a corporation are preferred shares this would not in our view preclude such corporation from qualifying as a mortgage investment corporation as defined in subsection 130.1(6) of the Act.

Paragraph 130.1(6)(e) of the Act provides for a specific ordering in the payment of dividends. Dividend entitlements must first be paid to preferred shareholders then a like amount must be paid to the common shareholders and finally any further dividends must be paid pari passu to all shareholders regardless of class. In our view the existence of multiple classes of preferred shares would not be contrary to paragraph 130.1(6)(e) provided that all shareholders have the right to participate pari passu in the payment of dividends beyond (1) their dividend entitlements, in the case of preferred shareholders, and (2) a reasonably similar or like amount to common shareholders after taking the different class features and characteristics into consideration.

We hope that our comments have been of assistance.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate