7 July 1991 Income Tax Severed Letter - Large corporations tax — credit union 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.

Dear Sirs:

Re: Large Corporation Tax-Credit Union Shares

We are writing in response to your letter of April 9, 1991, with supplementary materials provided by fax on July 15, 1991, in which you requested the views of Revenue Canada, Taxation on the interpretation of subsection 181.3(3) of the Income Tax Act, and, in particular, whether non-equity shares of a credit union would be included in the capital of a financial institution.

In our view, subparagraph 181.3(a)(ii) of the Income Tax Act includes in the capital of a financial institution all forms of share capital; it becomes a question of fact whether a particular instrument is part of the capital stock or a liability of the financial institution. Some of the factors that we consider relevant are the voting and participating rights of the holder of the instrument, the interest or dividend entitlement of the instrument holder and the reserve requirements, if any, of the financial institution, in respect of the instruments. Other factors, such as the financial statement treatment, are also relevant.

The Credit Union Incorporation Act of British Columbia defines non-equity shares as shares evidencing indebtedness of the credit union to the holder of the share and as shares not representing an equity interest in the credit union. No voting rights attach to the non-equity shares. On winding-up, the holder of the non-equity share is entitled to a dividend as declared by the liquidator, but there is no entitlement to participate in the division of the remaining funds. The holders of non-equity shares are entitled to receive dividends, but the dividends are discretionary and non-cumulative. The holder of the non-equity shares is not entitled to receive any interest or other form of compensation from the credit union for the use of the funds. The sample balance sheet provided indicates that the non-equity shares are treated as a liability, although the notes to the financial statements state that there are five classes of shares, one being the non-equity shares. Discussions with an employee of the Financial Institutions Commission of British Columbia indicated that the reserves of a credit union would not be affected by the amount of non-equity shares outstanding.

The non-equity shares have some attributes of debt or deposits, such as the lack of a share certificate, the lack of voting and participation rights and the insurability by the Credit Union Deposit Insurance Corporation of British Columbia. However, the non-equity shares are not entitled to receive any interest, but they are entitled to participate in profits annually as determined by the Board of Directors. On a winding-up, the non-equity shares are treated in a similar manner to preference shares. On amalgamation, the non-equity shares would be exchanged for shares of the amalgamated entity. The credit union is not required to consider the non-equity shares in calculating its reserve requirements. As indicated in your fax, one of the purposes of the non-equity shares is to provide the credit union with funds which have a discretionary dividend which allows the credit union some flexibility to reduce or omit dividends in the event of poor operating results. These latter factors would indicate to Revenue Canada, Taxation that the non-equity shares are more similar to shares than to debt. Accordingly, it would be our view that the non-equity shares are part of the capital stock of the credit union for the purposes of subsection 181.3(3) of the Income Tax Act.

We would like to thank you for your assistance in providing us with information about the non-equity shares and regret that we cannot provide you with a more favourable response. The foregoing comments do not constitute an advance income tax ruling and, therefore, are not binding on Revenue Canada, Taxation, in respect of a specific situation.