CRA considers that the operation of a price adjustment clause to reduce preferred shares’ redemption amount to below the shares’ “specified amount” can result in full Part VI.1 tax

Ss. 191(4) and (5) generally exclude deemed dividends, arising on the redemption of taxable preferred shares, from Part VI.1 tax to the extent that the redemption proceeds do not exceed a qualifying specified amount contained in the share terms. CRA effectively considers that the specified amount must be a specific dollar amount (not exceeding the fair market value of the consideration for which the shares were issued), which will not be considered to have changed on the subsequent operation of a price-adjustment clause on the redeemed shares’ redemption amount. Accordingly if, following preferred shares’ redemption, their redemption amount is adjusted upwards, the originally-calculated deemed dividend will continue to be excluded from Part VI.1 tax, but the additional deemed dividend arising from such operation of the price adjustment clause will not be excluded.

On the other hand, if the PAC were to become operative to reduce the redemption amount to an amount that is less than the specified amount, the requirement in subsection 191(4), that the specified amount not exceed the fair market value of the consideration for which such shares were issued, would not be met. As a result, the entire amount of the original deemed dividend would be disqualified as an excluded dividend for the purposes of subsection 191(4).

Neal Armstrong. Summary of 4 May 2016 T.I. 2016-0634551E5 under s. 191(4).