Term Preferred Share

Cases

Canada v. Citibank Canada, 2002 DTC 6876, 2002 FCA 128

The taxpayer (a Schedule II chartered bank) acquired preferred shares of a public company which, after five years, were convertible into common shares of the public company at a conversion price equal to the current market price at the time of the conversion (as determined in accordance with a formula) of a common share of the public company.

The conversion feature did not represent the provision of "any form of guarantee, security or similar indemnity or covenant ... with respect to" the share investment of the taxpayer.

Given that "the definition of 'term preferred share' was clearly designed to combat a particular activity prevalent amongst specific actors in a specific setting, that is, financing transactions between a small group of specified financial institutions", it was clear that the definition applied "to a specific and sophisticated segment of taxpayers" and that the terms in the definition should be given their more technical meaning derived from the laws that applies to commerce in general and public listed companies in particular, rather than their ordinary dictionary meaning (p. 6882). Further, Parliament intended to tax arrangements which were, in substance, debt arrangement whereas, here, Citibank, which had no assurance as to the value it would realize when common shares into which it converted were sold, was in substance making a share investment. Finally, the Minister's proposed interpretation ignored "the commercial context of subparagraph 248(1)(a)(iii) and would deem the Citibank conversion formula to be impermissible simply because the Minister views the possibility of Citibank's recovery as being better than under another model" (p. 6884), and the Supreme Court had consistently warned against finding unexpressed parliamentary intent in detailed and clearly worded provisions of the Act.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Ordinary Meaning 144

See Also

MacNiven v. Westmoreland Investments Ltd., [2001] 1 All ER 865 (HL)

After noting that Aldous L.J. stated in British and Commonwealth Holdings plc v. Barclays Bank plc 1 All ER 381 at 395 that "the words 'financial assistance' are not words which have any recognised legal significance whereas the word 'indemnity' does. It is used in the section as one of a number of words having a recognised legal meaning", Lord Hoffmann stated (at p. 881) that "I would only add by way of caution that although a word may have 'a recognised legal meaning', the legislative context may show that it is in fact being used to refer to a broader commercial concept".

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt interest paid with loan 124
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(d) capitalization of interest through payment and readvance respected 124
Tax Topics - Statutory Interpretation - Ordinary Meaning 62

Penner v. The Queen, 94 DTC 6567 (FCTD)

Teitelbaum J. indicated (at p. 6592) that he did not believe that the reference in former s. 192(6)(c)(iii)(B) to "a share ... of the capital of a taxable Canadian corporation issued ... before 1987 ... where, at that time ... the corporation [or] a person with whom the corporation does not deal at arm's length ... could, at the time the share was issued reasonably have been expected ... to reduce the paid-up capital of the corporation in respect of the share" did not apply to a winding-up of the corporation in light, inter alia, of the separate reference in s. 192(6)(b) to a share on which there was a liquidation entitlement and the consideration "that since the liabilities of a liquidating and dissolving company must be discharged in full, the concept of stated capital ceases to have any particular relevance for corporate law purposes".

Apple Fields Ltd. v. New Zealand Apple and Pear Marketing Board, [1991] 2 WLR 129 (PC)

S.27(1) of the Commerce Act 1986 (New Zealand) provided:

"No person shall enter into a contract or arrangement, or arrive at an understanding, containing a provision that has the purpose ... of substantially lessening competition in a market."

Lord Bridge stated (p. 134):

"'Arrangement' is a perfectly ordinary English word and in the context of section 27 involves no more than a meeting of minds between two or more persons, not amounting to a formal contract, but leading to an agreed course of action."

Words and Phrases
arrangement

Administrative Policy

1999 Ruling 992747

Para. (b) will not apply where the issuer is controlled by a person related to the shares' owner.

11 September 1996 Internal T.I. 7-961310 -

Preferred shares that were convertible or exchangeable into a number of common shares determined by dividing the preferred shares' redemption value by the greater of (a) the stipulated value of a common share that was lower than its trading value on the date of issuance of the preferred shares, and (b) the average trading value of a common share during a specified number of days in a period preceding the date of conversion or exchange, would be term preferred shares by virtue of subparagraph (a)(iii) of the definition. After noting that in Re J.H. (1911), 25 O.L.R.,"security" was defined as "something which makes the payment of money more secure", RC stated that "it appears that the holder is being granted rights intended to secure the recovery of his original investment", and that "an investor in the Shares had in fact a guarantee or a security to recover its investment upon the conversion; he was more secure within the ordinary meaning of the words guarantee or security".

1996 Tax Ruling 961084 (C.T.O. "Conversion of Debt into Preferred Shares")

Preferred shares issued on a debt restructuring that are convertible at any time into that number of non-voting shares of the issuer that is determined by dividing the fair value of the preferred shares by the market value of the common shares at the time of the conversion (determined by reference to the 20-day average market price of the common shares prior to the date of conversion) will not be term-preferred shares. The conversion formula does not provide any guarantee or indemnity.

14 September 1994 T.I. 941992 (C.T.O. "Section 84(4.2)")

"Where a corporation has only one class of common shares outstanding that are not TPS, in our view, such shares would generally not become TPS solely as a result of a shareholders' resolution to reduce the stated capital of the common shares in order to distribute an amount to the shareholders. If, however, a specified financial institution can cause the shareholders' resolution to reduce the stated capital of a class of shares, subsection 84(4.2) of the Act may apply"

93 C.R. - Q. 9

Shares held by an SFI that it has agreed to sell to an arm's length person will be term-preferred shares by virtue of subparagraph (a)(ii) of the definition.

17 July 1992 External T.I. 5-911644 -

A convertible or exchangeable share which is not a term preferred share under s.(a)(iv) of the definition, might still be a term preferred share under s.(a)(i) of the definition.

26 June 1992 T.I. 911683 (March 1993 Access Letter, p. 87, ¶C248-128)

A conversion feature pursuant to which a preferred share could be converted, after a period of five years, into common shares of the issuing corporation having a fair market value equal to the redemption amount based on the weighted average trading price of the publicly-traded common shares for the 20-day trading period immediately proceeding the day when notification of the conversion was given, would make those shares term preferred shares under subparagraph (a)(iii).

91 C.R. - Q.15

The wording of ss. (a)(i) and (ii) of the definition of term preferred share may be broad enough to include a share with "piggyback" rights.

23 September 1991 T.I. (Tax Window, No. 9, p. 19, ¶1468)

A shareholders' agreement which provides that a shareholder or group of shareholders may be required to purchase the shares of another shareholder at fair market value, or face the prospect of selling their own shares at fair market value, is a guarantee or security with respect to the shares for purposes of subparagraph (a)(iii).

16 October 1990 T.I. (Tax Window, Prelim. No. 1, p. 22, ¶1027)

The phrase "may reasonably be expected" in paragraph (e) of the definition of short-term preferred share, in paragraph (i) of the definition of term preferred share and the definition of "carved-out property" in s. 209(1), and the definition of "securities lending arrangement" in s. 260(1) and the definition of "non-qualifying expenditures" in s. 37(7)(f)(iii)(E) establishes an objective test based on a balance of probabilities and a test which should take into account the expectations of an informed party with access to the available facts.

89 C.R. - Q.19

"We acknowledge that paragraph (h) is not applicable for cases where the guarantee agreement could be considered to relate only to earnings to be derived by reason of the ownership, holding or disposition of the share. In practice, we have not encountered this type of situation"

89 C.R. - Q.17

Where a preferred share is convertible into common on the basis of 95% of the market value of the common at the time of exchange, this will not cause the preferred share to be a term preferred share if the 5% exchange premium is given to reflect the saving of brokerage fees and other similar costs of issue.

89 C.R. - Q.18

In determining whether an issuer of a share is controlled by a specified financial institution either alone or together with any other specified financial institution for purposes of paragraph (b), one of the factors to be considered is whether such specified financial institutions have sufficient common connections or business interests.

ATR-5 (16 Dec. 85)

the right of holders of common share purchase warrants to surrender preferred shares of the company to it in lieu of paying the cash subscription price did not render those shares term preferred shares in light of s.(a)(iv).

84 C.R. - Q.61

waiver of compliance with a covenant on the occurrence of what is a commercially accepted event of default is neither a change in the terms of the relevant agreement nor an event whereby the owner of the security could, otherwise than by reason of a failure or default, require repayment.

ATR-46, February 21, 1992

Description of arrangement for issuance of financial difficulty preferred shares by subsidiary of corporation in financial difficulty.

Articles

Elinore J. Richardson, "Term Preferred Shares Revisited", Corporate Finance, Vol VIII, No. 2, 2000, p. 726

Discussion of preferred shares with value-based conversion features.

Skingle, "A Guide through the Preferred Share Maze", 1994 Canadian Petroleum Tax Journal, Vol. 7, No. 1, p. 79.

Darling, "Revenue Canada Perspectives", 1992 Corporate Management Tax Conference Report, c. 5.

Schafer, "Tax Implications of Restructuring and Refinancing", under "Distress Preferred Shares", 1992 Corporate Management Tax Conference Report, c. 4.

Worndl, "Debt Restructuring for a Corporation in Financial Difficulty", Tax Profile, February, 1991

Discussion of financial difficulty shares.

Brussa, "Strategies for Troubled Times", 1990 Conference Report, c. 9

Discussion of financial difficulty shares.

Ruby, "Recent Financing Techniques", 1989 Conference Report, c.27 under "Perpetual Preferred Shares"

Discussion of auction preferred shares.

Dyer, "Preferred Share Financing", 1986 Corporate Management Tax Conference, p. 20.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 112 - Subsection 112(2.2) 10

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