Taxable Preferred Share

Administrative Policy

15 March 2013 External T.I. 2012-0443471E5 - Taxable Preferred Shares

Before concluding that shares would be considered to be taxable preferred shares where they were entitled to 75% of the profit resulting from an adventure in the nature of trade, CRA stated:

[A] formula that contains a variable which is a pre-determined percentage of net profit will be considered as fixed….[Here] the terms of the shares provide a binding formula that limits to a maximum the total amount that can be paid out as dividends on these shares for any one year.

2012 Ruling 2011-0431481R3 - Short-term and Taxable Preferred Share

following the approval of its shareholders for a winding-up and liquidation of a corporation, its common shares would not be taxable preferred shares under s. (f) of the definition thereof nor short-term preferred shares under ss. (a)(i) and (e)(i) of the definition thereof.

7 March 2007 External T.I. 2005-0157381E5 - Regulation 6204

Although it would appear that Regulation 6204(1)(a)(i) would cause shares not to be prescribed shares if a loan agreement by the corporation stipulated that it would not pay a dividend of greater than 50% of cumulative net income under the terms of the loan agreement, a different response was given at the 1989 TEI Round Table so that the Directorate would be prepared to deal conclusively with this issue in the context of advance ruling request where all the facts and definitions of terms were known. Further, the TEI response only referred to Regulation 6204 and would not apply inter alia to the definition of "taxable preferred share" in s. 248(1).

2003 Ruling 2003-003407 -

The Class A and Class B Shares of a public corporation participated equally in such dividends as the directors determined to declare and pay in any year without preference or distinction, except that the holders of Class A shares were not entitled to any dividend until a dividend at the rate of $X per share had been paid on the Class B shares. In the past, the company generally had not paid dividends, but now had adopted a dividend policy to pay equal per-share dividends on the Class A and Class B shares in an amount that exceeded the Class B fixed per-share amount.

Such terms and conditions of the Class B shares and the dividend policy would not cause those shares to be considered to be taxable preferred shares.

Income Tax Technical News, No. 7, 21 February 1996 (cancelled)

An amendment to the articles allowing a corporation to pay a stock dividend in lieu of a cash dividend on a preferred share will result in the loss of the grandfathered status of the preferred share.

25 July 1994 T.I. 940707 (C.T.O. "Taxable Preferred Shares")

Where five corporate shareholders each owning 20% of the shares of a Canadian-controlled private corporation enter into an agreement of purchase and sale for their shares with an arm's length purchaser, with the acquisition to occur in five month's time, the subject shares will be taxable preferred shares, unless the exception in subparagraph (f)(ii) applies.

30 May 1991 T.I. (Tax Window, No. 3, p. 24, ¶1271)

A share may be within clause (b)(i)(C) if it is entitled to a minimum preferred dividend, even if the amount of the preference is nominal and the share is entitled to participate with other shares in any additional dividends declared.

7 March 1990 T.I. (August 1990 Access Letter, ¶1392)

Where a corporation issues common shares under an employee share purchase plan for an issue price lower than the shares' then fair market value but it is agreed that employees will be compelled to sell their shares to the corporation upon termination of their employment for a price equal to the initial issue price, the shares issued under that plan will not come within the exemption in paragraph (f) because the fixed repurchase price could exceed the fair market value of the shares at that time.

18 October 89 Meeting with Quebec Accountants, Q.5 (April 90 Access Letter, ¶1166)

Although RC was willing to concede that it would consider not applying paragraph (e) in the case where an amendment is made to a shareholders agreement pursuant to a clause in the original agreement contemplating such amendment and stipulating the details of the new amending clause, in any other case an amendment to an agreement which did not originally provide for its amendment could trigger the application of paragraph (e).


Jay Lefton, Barbara Worndl, Jack Bernstein, "Exchangeable Shares", Tax Profile, Vol. 6, No. 6, June 2000, p. 61.

Ruby, "Plan of Arrangement Involving Diamond Resources Inc. and Inco Ltd", Cross-Border Taxation Issues and Developments, 1996, International Fiscal Association, p. 89

Includes a discussion of the Inco Class VBN Shares.

Shafer, "Income Access Shares", 1993 Conference Report, c. 18.

Ewens, "Amending Grandfathered Preferred Share Conditions", 1994 Canadian Tax Journal, No. 42, No. 2, p. 548.

Sugg, "Preferred Share Review: Anomalies and Traps for the Unwary", 1992 Conference Report, c.22.

Woods, "Dividend Access Shares", 1991 Canadian Tax Journal, p. 709.

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Tax Topics - Income Tax Act - Section 206 - Paragraph 206(1)(f) 0

Ruby, "Recent Financing Techniques", 1989 Conference Report, c. 27 under "Amendments to Existing Shares -Loss of Grandfathering Status", pp. 38-40.

Ewens, "The New Preferred Share Dividend Tax Regime", 1988 Conference Report, c. 21

Paragraph (f)

Administrative Policy

5 October 2012 APFF Roundtable, 2012-0454171C6 F - Taxable Pref. Shares and Short-Term Pref. Shares

para. (f) tests applied at time of payment and receipt of dividend

A specified corporation in relation to the issuing corporation agrees to acquire shares for a specified amount within 60 days, but in fact the acquisition cannot be completed until the 61st day.

After noting that the "particular time" for determining taxability under Parts IV.1 and VI.1 is the time of receipt or payment of the dividend, respectively, CRA stated (TaxInterpretations translation):

Consequently, at the time when the corporation pays or receives a dividend, as the case may be, the relieving provisions of subparagraphs (f)(i) or (f)(ii) of the definition of TPS or those of clauses (a)(i)(A) or (a)(i)(B) of the definition of STPS may or may not be applicable in determining if the share on which the dividend is paid or received constitutes a TPS and/or a STPS, in accordance with the circumstances.

CRA then indicated that the determination of this question would require a review of all the facts and circumstances bearing on the particular situation.