Words and Phrases - "share"
Before concluding that “for the purposes of the Act, a cooperative is a corporation, a share of the capital stock of a cooperative is a share and a member can be a shareholder,” CRA stated:
First, a cooperative is a legal person by virtue of section 3 of the Cooperatives Act, CQLR, c. C-67.2. In addition, under the definition of "corporation" in subsection 248(1), a "corporation" includes such a person. Accordingly, we are of the view that for the purposes of the Act, a cooperative is a corporation. Furthermore, the definition of "share" in subsection 248(1) provides that a share of the capital stock of a corporation includes a share of the capital of a cooperative corporation within the meaning of subsection 136(2). Finally, the definition of "shareholder" in subsection 248(1) includes a member or other person entitled to receive payment of a dividend. Consequently, we are of the view that a member of a cooperative holding a share of the capital stock entitled to receive a dividend is a shareholder for the purposes of the Act.
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|Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(15)||application to shares of cooperative||106|
|Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Prohibited Investment - Paragraph (b) - Subparagraph (b)(i)||share of cooperative can be a share of corporation for prohibited investment purposes||66|
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.”
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|Tax Topics - Income Tax Act - Section 90 - Subsection 90(2)||distributions on MRPS were equity distributions||111|