15 April 1994 Internal T.I. 9327357 - TAXABLE PREFERRED SHARES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed
to be correct at the time of issue, may not represent the
current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

whether a share with a preferential dividend
entitlement based by way of formula on the price of
gold would be a "taxable preferred share" whether a
share with a liquidation entitlement based, in part, on
the price of gold would be a taxable preferred share

Position TAKEN:

yes
yes

Reasons FOR POSITION TAKEN:

The fact that a formula contains a variable does not
preclude the dividend entitlement from being fixed the
exception in paragraph (d) may not apply as it cannot
be said that the liqidation entitlement of the
preferred shares is "solely" based on the liquidation
entitlement of the common shares

XXXXXXXXXX 940301

Attention: XXXXXXXXXX

April 15, 1994

Dear Sirs:

This is in reply to your letter of February 4, 1994, wherein you requested our interpretation of paragraph (b) of the
definition of "taxable preferred shares" in subsection 248(1) of the Income Tax Act (the "Act") in a specific situation.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where the particular transactions are completed, the enquiry should be addressed to the relevant District Taxation Office. The foregoing comments are, therefore, of a general nature only, and are not binding on the Department.

It is our view that shares having a preferential dividend entitlement based, by way of formula, on a percentage of the value of a particular commodity would be "taxable preferred shares" under clause (b)(i)(A) of the definition in subsection 248(1) of the Act. The fact that the formula contains a variable does not preclude the argument that the amount of dividends will be "fixed", in the sense of "set" or "established" by that formula.

Similarly, it is our view, that shares having a liquidation entitlement which is fixed by way of formula would be taxable preferred shares under subparagraph (b)(ii) of the definition in subsection 248(1) of the Act unless the relief in paragraph (d) thereof is applicable. In our view, paragraph (d) of the definition is not applicable to the situation that you have described.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch