Table of Contents

Administrative Policy

8 January 2016 Internal T.I. 2015-0604491I7 - mandatory redeemable preferred shares

MRPS (Luxembourg hybrid instruments which were “very similar to traditional shares under Canadian business corporations statutes”) were equity

Canadian Parent holds mandatorily redeemable preferred shares (“MRPS”), as well as ordinary common shares in private limited liability companies, (“Holdings” and “Finance”), and is their sole shareholder. The articles of incorporation of Holdings specify a “nominal” euro value for each MRPS and that Holdings must maintain a share premium account and a reserve account for the MRPS. They must be redeemed on the specified anniversary of their issuance subject to earlier redemption at the issuer’s option, but with the payment of the redemption proceeds (in cash or in kind, and including accrued dividends) made only using property permitted for distribution in accordance with the governing corporate law (assumed in this summary to be of Luxembourg) or out of the proceeds of a new issuance made for the purpose of the redemption.

A MRPS shareholder may receive a (generally annual) cumulative preferred dividend (“Dividend 1”) at a rate applied to the MRPS’ nominal capital and a second cumulative preferred dividend (“Dividend 2”) at a rate applied to the aggregate of the MRPS’ nominal capital and the amounts credited to their share premium and reserve accounts (including a required minimum reserve), subject to any agreed cap. Where Dividend 2 is not declared or paid notwithstanding sufficient distributable reserves or available profits, that amount will be capitalized and transferred to the MRPS reserve account.

The MRPS are freely transferable while there is only one shareholder and, like the ordinary shares, have full voting rights (but any “Keep Well Agreement” must be transferred with the shares). Under a Keep Well Agreement between Holdings and Canadian Parent, Canadian Parent undertakes to subscribe for ordinary shares of Holdings if Holdings has insufficient funds to redeem the MRPS at their maturity.

The MRPS in Finance are similar to those in Holdings with a few exceptions, including: additional (asset impairment) exceptions respecting redemption and the redemption amount; there is no Keep Well; and if the MRPS cannot be redeemed at their full redemption price, the residual portion remains payable and carries interest at a specified rate.

The MRPS are treated as debt for Luxembourg tax purposes but as equity for Luxembourg corporate, bankruptcy and private law purposes, and distributions on the MRPS have the same nature under such corporate law as dividends on the ordinary shares.

If distributions on the MRPS were dividends, they would come out of exempt surplus. Are the MRPS equity for purposes of the Act?

After referring to the two-step approach to entity classification (as summarized inter alia in 2015-0581511C6) as being “often of considerable assistance in characterizing foreign instruments,” CRA noted that the MRPS’ salient characteristics included that they are governed by articles of incorporation (which state they are part of corporate capital), they “are treated in the same way as ordinary common shares, which we have assumed rank after debt in a bankruptcy,” and they must be redeemed within the specified period, but can only be redeemed from funds available for distribution under Luxembourg law or from the proceeds of a new share issuance. Before concluding that the MRPS were equity, CRA stated:

These characteristics are very similar to traditional shares under Canadian business corporations statutes. Typically, under these statutes, shares are identified as such under the articles of incorporation or other similar constating documents. The rights of shareholders are set out in those documents and in the governing statute. … These corporate documents are not bilateral contracts… . Shares may or may not carry votes, but in respect of the governance of the corporation, typically only shareholders may vote on matters such as the election of the board of directors. An instrument that is characterized as a share typically ranks last in a bankruptcy.

The fact that the MRPS must be redeemed on or before a stipulated date does not detract from their character as shares.

CRA also referenced the comment in Barejo, 2015 TCC. 274 at para. 66 that “the Court is to look to and weigh the language chosen by the parties, the parties’ intentions, the surrounding circumstances, and the legislative régime in order to identify the characterization in favour of which the balance clearly tilts,” and also noted that “the status of the MRPS under the governing corporate and commercial law is of critical importance to the analysis.”

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 90 - Subsection 90(2) distributions on MRPS were equity distributions 111

18 June 2015 STEP Roundtable Q. 3, 2015-0572201C6 - 2015 STEP Q3 Redeemable Preferred Shares and 18(4)

equity/debt classification based on legal form

Does the position in 9619120 still apply? CRA responded:

It continues to be the position of the CRA that the classification of a financial instrument (e.g. a redeemable preferred share) as debt or equity for the purposes of subsection 18(4) will be based on its legal form regardless of its accounting classification.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(5) - Equity Amount - Paragraph (a) equity/debt classification based on legal form 51

2 February 2015 External T.I. 2013-0510751E5 F - Cooperatives and Dividend Refund

fractions of cooperative capital not shares

In finding that a cooperative formed under the Quebec Cooperatives Act that is neither an agricultural cooperative corporation nor a cooperative corporation is eligible for a dividend refund, CRA, after having noted that such a cooperative is a legal person and a corporation, stated (TaxInterpretations translation):

Even if a cooperative has an RDTOH balance, it will likely not obtain a dividend refund in accordance with section 129 if the fractions of its capital do not constitute shares as defined under subsection 248(1).

As a fraction of the capital of a cooperative other than an agricultural cooperative corporation, a cooperative corporation and a credit union does not constitute a share…this type of cooperative is not able to obtain a dividend refund.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 129 - Subsection 129(1) entitlement of agricultural cooperative corporations or cooperative corporations to dividend refunds 225

30 April 2013 Internal T.I. 2012-0439741I7 -

treatment of MRPS as equity

withdrawn by CRA on 25 August 2014

Mandatory Redeemable Preferred Shares ("MRPS"): are voting; have a mandatory redemption date approximately 10 years from the allotment date, with the redemption proceeds (equal to the issue price, plus the Premium accrued to the redemption payment date) to be paid in cash on the mandatory redemption date; and have a Premium equal to the per share equivalent of (a) a fixed premium of 7.1% per annum of the issue price, compounded quarterly, plus (b) a variable premium of 5.5% of the aggregate net profit after tax less, minus any amount paid by way of dividend. The TSO position was that the MRPS were debt, consistent with their accounting treatment and their treatment for tax purposes "in other jurisdictions."

In indicating that the MRPS would be considered equity, CRA stated that "generally speaking, we will respect the form of the investment regardless of how it is accounted for or how it is treated for tax purposes in other jurisdictions," and that "payments of interest or dividends will derive their income tax consequences from the legal nature of the payment."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Dividend treatment of MRPS as equity 194
Tax Topics - Income Tax Act - Section 90 - Subsection 90(1) treatment of MRPS as equity 199

2012 Ruling 2012-0452291R3 - XXXXXXXXXX - ATR

MRPS were shares

A Canadian public company (Pubco) (acting through a branch in Country 1 – assumed here to be Luxembourg) will subscribe with cash for common shares and/or mandatorily redeemable preferred shares ("MRPS") of Finco. Finco is a Luxembourg company (likely, a S.à r.l.). The MRPS are voting, do not bear dividends, are convertible at any time into a Finco common shares havign a fair market value equal to the par value of the converted shares or into another class of MRPS at the holder's option, are redeemable before the maturity date at the holder's option and are required to be redeemed by Finco on the specified maturity date. They are debt for Luxembourg tax purposes, but shares for Luxembourg corporate purposes.

Rulings inter alia that Finco is a corporation, ownership interests in Finco are shares, and distributions of its profits are dividends.

15 July 2011 Internal T.I. 2010-0388621I7 - Entity Classification - Liechtenstein Anstalt

division of capital not necessary for "shares"

CRA referred to the finding in Ryall v. Du Bois that in substance a share represented "a portion of the capital" of a company and further stated that:

A share has been defined as any of the equal interest or rights into which the entire capital stock of a corporation is divided.

A Liechtenstein anstalt did not issue shares within the meaning of s. 248(1), as there was only one beneficiary. However, a division of the capital of the anstalt into shares was unnecessary so that it was reasonable to consider that the Canadian resident beneficiary's interest was the equivalent of a share. "For Canadian tax purposes, it should suffice that the interest is what accords him the same rights as are normally conveyed by a share."

2010 Ruling 2009-0347271R3 - Foreign Affiliate Restructuring Financing

unnecessary for ownership interest to be divided into shares

In accordance with its constating document, a foreign cooperative (Forco1) has the following general characteristics:

(a) Forco1 is a legal entity separate from its members;

(b) Forco1 has the capacity to contract in its own name, for its own account and at its own risk;

(c) Forco1 is incorporated for an indefinite period;

(d) admission and transfer of membership in Forco1 is subject to members' approval;

(e) each member is entitled to at least one vote, and the total number of votes is in proportion to the capital accounts;

(f) members have separate capital accounts the repayment of which is subject to the approval of all members;

(g) profits are available to Forco1 and can be retained by Forco1 unless the members vote in favour of distribution;

(h) the board of directors has authority to represent Forco1; and

(i) members are excluded from any liability for any of Forco1's debts or losses.

Rulings that Forco1 will be considered a corporation and that the ownership interests in it will be shares. (The summary noted that it was not necessary that ownership interests be divided into units, and that IT-392 "still represents the CRA's position..")

2010 Ruling 2010-0373801R3 - Conversion from a BV to a DC

membership interest in Dutch coop a share
Proposed transactions

BV, which is a private limited liability company under Dutch law, will convert into a Dutch cooperative ("DC") pursuant to the Dutch Civil Code. By virtue of the execution of the notarial deed effecting the conversion before a notary, DC will be regarded as a legal entity under the Dutch Civil Code that continues to exist separate and apart from its shareholders. On the conversion of BV into DC, the issued share capital of BV will be cancelled and its shareholders (Holdco and Newco) will automatically become members of DC holding membership interests proportionate to their respective shareholdings in BV immediately before such conversion.


IT-392, para. 3 regarding the meaning of "share" will apply to DC such that Holdco and Newco will be considered to own shares of DC.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85.1 - Subsection 85.1(3) drop-down by the two Cdn. “shareholders” of Dutch co-op (DC) of FAs in consideration for proportionate “increases” in their membership interests considered to be for “shares” 191
Tax Topics - Income Tax Act - Section 95 - Subsection 95(4) - Direct Equity Percentage 44
Tax Topics - Income Tax Act - Section 86 - Subsection 86(1) exchange of shares in Netherlands BV for membership interests in Dutch coop qualified under s. 86 139
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition conversion of Netherlands BV to Dutch co-op 89

IT-392 (Archived) "Meaning of the Term 'Share'"

capital of non-share corporation considered to be divided into shares

3. In those instances in which the ownership of a foreign business entity is not divided into units entitled "shares", and in which the foreign business entity is considered to be a corporation, the Department views the foreign business entity as if it has a capital stock of 100 issued shares. Each owner of a beneficial interest in the foreign business entity is then considered to own a number of shares proportionate to his beneficial interest in the foreign business entity. If, for example, a German GmbH Shareholder A has a share of DM 200,000, Shareholder B has a share of DM 200,000 and Shareholder C has a share of DM 400,000 the Department would consider that the shareholdings were as follows: Shareholder A 25 shares, Shareholder B 25 shares, Shareholder C 50 shares.


Sheppard, "U.S. Treasury Department Stands up to Wall Street with Notices on Equity-Flavored Debt and Ruling on Intercorporate Dividends", Tax Notes International, May 2, 1994, p. 1182.

Edgar, "The Classification of Corporate Securities for Income Tax Purposes", 1990 Canadian Tax Journal, p. 1141.