15 March 2013 External T.I. 2012-0443471E5 - 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.

Principal Issues: Whether a share which has a dividend entitlement equal to 75% of the profit resulting from an adventure in the nature of trade would be considered to be a taxable preferred share.

Position: Yes – in the situation described.

Reasons: A formula fixes the amount of the dividends and limits the dividends to a maximum.

XXXXXXXXXX
2012-044347
Andrea Boyle, CGA

March 15, 2013

Dear XXXXXXXXXX:

Re: Taxable Preferred Shares

We are writing in reply to your email received April 9, 2012. You asked us whether shares would be considered to be taxable preferred shares where a share is entitled to 75% of the profit resulting from an adventure in the nature of trade.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. We are, however, prepared to offer the following general comments, which may be of assistance.

In answering your question we have restricted ourselves to the consideration of the criteria referred to in your letter. Specifically, whether, under the definition of "taxable preferred share" found under subsection 248(1) of the Income Tax Act, the amount of the dividend on the share as described, is, by way of a formula or otherwise:

• fixed,
• limited to a maximum, or
• established to be not less than a minimum and there is a preference over any other dividend that may be declared or paid on any other share of the capital stock of the corporation

Our position is that when the amount of the dividends to be paid is established by a formula, the fact that the formula contains a variable does not preclude an argument that the amount of dividends will be "fixed", in the sense of "set" or "established" by that formula.

It has generally been our view that a formula that contains a variable which is a pre-determined percentage of net profit will be considered as fixed.

In the situation described, it is also our view that the terms of the shares provide a binding formula that limits to a maximum the total amount that can be paid out as dividends on these shares for any one year.

Therefore, in our view, a formula which calculates dividends based on a pre-determined percentage of the profits for a given year fixes the amount of the dividends on the shares and limits the dividends on these shares to a maximum. Consequently, the shares described would fall under the definition of a taxable preferred share.

We trust that these comments will be of assistance.

Yours truly,

Doug Watson
for Director
Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch