Terminal Dock and Warehouse Co. Ltd. v. MNR, 59 DTC 542, 23 Tax ABC 40
Whether the taxpayer was related to another corporation (“Robin Hood”) turned on whether pursuant to s. 36 of the 1948 Income Tax Act, Robin Hood “owned directly or indirectly 70 per cent or more of all the issued common shares of the capital stock of” the taxpayer. This turned on whether the “Prior Preference Shares” of the taxpayer held by Robin Hood qualified as “common shares” under the definition in s. 127(1)(g) (similar to the current s. 248(1) definition).
The Articles and Memorandum of Association provided that the Prior Preference Shares were voting, had a preferential dividend entitlement of $2 per share per fiscal year and were entitled, after a preferred distribution had been made on another class of shares, to share equally with the common shares on liquidation, dissolution or winding-up. There was no redemption provision in respect of the Prior Preference Shares. Mr. Fordham held that the Prior Preference Shares were not “common shares” for purposes of the Act and, in reaching this conclusion, stated (at p. 544):
Initially, it is plain that a common share, as defined in the Income Tax Act, has the same meaning as obtains in company law, but with two exceptions. It does not embrace a share that, in the event of a reduction or redemption of capital, does not give its holder the right to participate in the corporation's assets …. What do the relevant paragraphs of [the Articles of Association] say in this regard? First, and as already mentioned, the prior preference shares were not redeemable and thus, during the taxation years under appeal, could never be the subject of redemption procedure. This entirely eliminates one of the two qualifying features found in [the definition of “common share” in] section 127(1)(g). It only leaves for consideration the consequences of a reduction in capital. It seems clear that such an eventuality would confer no benefit on the holders of the prior preference shares. Paragraph (b) [of the Articles of Association] contains the only provisions to be examined in this regard and these are based on the liquidation, bankruptcy, dissolution or winding up of the company. Only in such an event do the holders of prior preference shares participate in the sharing of surplus assets. Section 127(1) (g) makes no reference whatever to a winding-up and similar proceedings. Where the circumstances warrant, a reduction of capital may take place under the direction of the appropriate court and without any winding-up proceedings being instituted. Should this occur, there is nothing in Article 3 to indicate that holders of prior preference shares may participate in any surplus assets as a result. On the contrary, paragraph (c) makes it very clear that only as provided in paragraph (b) and (c) may such shareholders participate. Neither of these paragraphs contains any reference whatever to a reduction of capital made pursuant to a court order, which is ordinarily what is required. Vide sec. 63, "Companies Act.
A U.S. public corporation, which had two actively-traded classes of common shares, whose respective performance tracked two businesses, wished to spin-off one of the two businesses to the holders of the related tracking shares (the “Original Shares”) as a tax-free distribution for Code purposes. It did so by transferring that business to a newly-incorporated U.S. subsidiary (Splitco) in consideration for Splitco common shares, and then distributing those shares on the Original Shares (with the Original Shares ultimately being cancelled).
The Directorate found that the requirements of ss. 86.1(2)(a) to 86.1(2)(c) for an eligible distribution were met, so that it apparently accepted that the tracking shares were common shares.
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|Tax Topics - Income Tax Act - Section 86.1 - Subsection 86.1(2)||s. 86.1(2)(c)(i) references central management and control test/tracking shares satisfied s. 86.1(2)(a)||177|
where a corporation (intended to qualify as a mortgage investment corporation) has two classes of shares with identical attributes except that only one of the classes is entitled to bonus dividends, both classes of shares would qualify as common shares, so that s. 130.1(6)(e) (which is relevant only where there are holders of preferred shares) would not apply to require that the payment of dividends be ordered in the specified manner.
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|Tax Topics - Income Tax Act - Section 130.1 - Subsection 130.1(6)||no bonus dividend entitlement||71|
16 September 2004 External T.I. 2004-008852 -
When asked whether Class A preferred shares of a particular corporation would be common shares, the Directorate noted that in Terminal Dock and Warehouse Co. Ltd. v. MNR (1959), 23 Tax ABC 40, the Tax Appeal Board indicated that whether shares fall within the definition of "common share" was a matter of construction of the relevant document.