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 "alphabet shares" are taxable preferred shares.
Position:
They could be.
Reasons:
Depends on the manner in which the dividend entitlement is defined.
961510
XXXXXXXXXX J.P. Dunn
Attention: XXXXXXXXXX
June 10, 1996
Dear Sirs:
Re: Taxable Preferred Shares
We are writing in response to your correspondence of April 26, 1996 wherein you had requested that we give further consideration to our response of April 17, 1996 to you regarding the definition of "taxable preferred share" in subsection 248(1) of the Income Tax Act (the "Act") and, more specifically, whether that definition would apply to a share of a corporation the dividends upon which are attributable to the profits of a specific business division of a corporation.
In our view, the fact that the terms or conditions of the share or of an agreement in respect of the share restrict the dividends payable on the share to the profits of a specific business division could be construed as meaning that those dividends are "limited to a maximum" as described in subparagraph (i)(b) of the definition of "taxable preferred share". Notwithstanding that the share may be, as you note, a fully participating share, it is our view that it is only fully participating with respect to the particular operating division and, consequently, this may lead to the conclusion that the dividends on the share are limited to a maximum; that being the profits generated by that division.
In the alternative, however, should the corporation indicate that the dividend entitlement is intended to reflect the financial results of a specific operating division, it is our view that the dividend entitlement would not, generally, be considered to be "limited to a maximum" to the extent that dividend would not, pursuant to the terms and conditions of the share or an agreement relating thereto, necessarily be restricted to such results. In such a situation, it is our view that the dividend could, at the discretion of the directors, be either a greater or lesser amount than the results attributable to the division depending upon the financial or operating results of the corporation as a whole.
Although the manner in which the dividend entitlement is defined and the extent to which that entitlement is limited would determine whether the share would be a "taxable preferred share" within the meaning of that term in subsection 248(1) of the Act, it is our view that simply an indication by the corporation that the dividend is intended to reflect the results of a particular operating division would not, in and of itself, cause the share to come within the aforementioned definition.
We trust that this is the information which you require.
Yours truly,
Section Chief
Corporate Financing Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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