Short-Term Preferred Share

Background

A CCPC (B Ltd.) has two outstanding classes of common shares: the Class B common shares are held by three taxable Canadian corporations or partnerships (C, D, and E): and the Class A common shares are held by three inter vivos trusts (Trusts F, G, and H).

Such shareholders are parties to a unanimous shareholders agreement (the “USA”), which provides inter alia that C, D, and E can each require B Ltd. to repurchase their Class B common shares for an amount not exceeding their FMV, and accords them an option to require B Ltd. to repurchase all or part of the Class A common shares and convertible securities (i.e., of the trusts) in the event of specified deaths, for a price equal to their FMV, with the FMV in either case being determined at the time the repurchase agreement is entered into (rather than at the acquisition time).

Furthermore, B Ltd. was accorded the right to repurchase Class B common shares held by Trust F, G, or H on the occurrence of various specified triggering events, such as a director-shareholder being dismissed for serious cause, or a shareholder officer, a member of their group becoming bankrupt or insolvent, or breaching specified provisions of the USA, for an amount equal to a specified percentage of the FMV of the shares concerned—except that if the triggering event was (i) a shareholder-officer who held Class A common shares voluntarily leaving the service of B Ltd., the repurchase price would be the shares’ FMV, or (ii) a shareholder-officer or a member of their group being found guilty by a court of competent jurisdiction for a non-traffic offence, the repurchase price would be for the lesser of a specified amount and the shares’ FMV.

Proposed transactions

The shareholders of B Ltd. will amend the USA to provide that in all such instances referring to FMV, the reference will instead be to FMV calculated without regard to the repurchase agreement, and also in various instances changing the purchase price to FMV rather than a percentage of FMV or the lesser of FMV and a specified dollar amount.

B Ltd. will then declare taxable dividends on its Class A and B shares, to be paid through the issuance of promissory notes and in amounts not exceeding the safe income attributable to the respective shareholdings.

Rulings

S. (a)(i)(B) of “short-term preferred share” and s. (f)(ii) of “taxable preferred share” will apply to such repurchases to the extent that the amount paid does not exceed the FMV of the shares, calculated without regard to the repurchase agreement, on the acquisition date specified therein.

A Canadian public corporation (the “Corporation") purchased for cancellation common shares that were tendered to it under an issuer bid under which the purchase price was established pursuant a modified Dutch auction. Thus, at the expiry of its offer, the Corporation selected the lowest purchase price for the tendered common shares that allowed it to purchase the specified aggregate dollar value of shares, with shares deposited at or below the purchase price being redeemed at that purchase price.

After initially filing its return without reporting Pt VI.1 tax, the Corporation then filed an amended income tax return for in which it took the position that the common shares redeemed were short-term preferred shares ("STPS"), so that there was Part VI.1 tax payable, and a deduction generated under s. 110(1)(k).

In finding that instead there was no Part VI.1 tax payable, the Directorate stated:

[T]he common shares … were neither "STPSs" nor "TPSs" … . [B]y virtue of the exceptions in subparagraphs (a)(i) and (e)(i) of the definition of STPS and paragraph (f) of the definition of TPS in subsection 248(1), the Corporation’s public offer to purchase its shares for cancellation under a modified Dutch auction and the agreements entered into on XXXXXXXX with certain shareholders who tendered their shares in response to the offer did not, in themselves, result in the Corporation’s common shares becoming STPSs or TPSs. Furthermore, we are of the view that the purchase price per share … did not exceed the FMV of the Corporation's common shares at the time these agreements were entered into or at the time the shares were acquired.