Share

Does the position in 9619120 still apply? CRA responded:

It continues to be the position of the CRA that the classification of a financial instrument (e.g. a redeemable preferred share) as debt or equity for the purposes of subsection 18(4) will be based on its legal form regardless of its accounting classification.

In finding that a cooperative formed under the Quebec Cooperatives Act that is neither an agricultural cooperative corporation nor a cooperative corporation is eligible for a dividend refund, CRA, after having noted that such a cooperative is a legal person and a corporation, stated (TaxInterpretations translation):

Even if a cooperative has an RDTOH balance, it will likely not obtain a dividend refund in accordance with section 129 if the fractions of its capital do not constitute shares as defined under subsection 248(1).

As a fraction of the capital of a cooperative other than a corporation corporation as well as an agricultural cooperative corporation or credit union does not constitute a share…this type of cooperative is not able to obtain a dividend refund.

withdrawn by CRA on 25 August 2014

Mandatory Redeemable Preferred Shares ("MRPS"): are voting; have a mandatory redemption date approximately 10 years from the allotment date, with the redemption proceeds (equal to the issue price, plus the Premium accrued to the redemption payment date) to be paid in cash on the mandatory redemption date; and have a Premium equal to the per share equivalent of (a) a fixed premium of 7.1% per annum of the issue price, compounded quarterly, plus (b) a variable premium of 5.5% of the aggregate net profit after tax less, minus any amount paid by way of dividend. The TSO position was that the MRPS were debt, consistent with their accounting treatment and their treatment for tax purposes "in other jurisdictions."

In indicating that the MRPS would be considered equity, CRA stated that "generally speaking, we will respect the form of the investment regardless of how it is accounted for or how it is treated for tax purposes in other jurisdictions," and that "payments of interest or dividends will derive their income tax consequences from the legal nature of the payment."

A Canadian public company (Pubco) (acting through a branch in Country 1 – assumed here to be Luxembourg) will subscribe with cash for common shares and/or mandatorily redeemable preferred shares ("MRPS") of Finco. Finco is a Luxembourg company (likely, a S.à r.l.). The MRPS are voting, do not bear dividends, are convertible at any time into a Finco common shares havign a fair market value equal to the par value of the converted shares or into another class of MRPS at the holder's option, are redeemable before the maturity date at the holder's option and are required to be redeemed by Finco on the specified maturity date. They are debt for Luxembourg tax purposes, but shares for Luxembourg corporate purposes.

Rulings inter alia that Finco is a corporation, ownership interests in Finco are shares, and distributions of its profits are dividends.

CRA referred to the finding in Ryall v. Du Bois that in substance a share represented "a portion of the capital" of a company and further stated that:

A share has been defined as any of the equal interest or rights into which the entire capital stock of a corporation is divided.

A Liechtenstein anstalt did not issue shares within the meaning of s. 248(1), as there was only one beneficiary. However, a division of the capital of the anstalt into shares was unnecessary so that it was reasonable to consider that the Canadian resident beneficiary's interest was the equivalent of a share. "For Canadian tax purposes, it should suffice that the interest is what accords him the same rights as are normally conveyed by a share."

In accordance with its constating document, a foreign cooperative (Forco1) has the following general characteristics:

(a) Forco1 is a legal entity separate from its members;

(b) Forco1 has the capacity to contract in its own name, for its own account and at its own risk;

(c) Forco1 is incorporated for an indefinite period;

(d) admission and transfer of membership in Forco1 is subject to members' approval;

(e) each member is entitled to at least one vote, and the total number of votes is in proportion to the capital accounts;

(f) members have separate capital accounts the repayment of which is subject to the approval of all members;

(g) profits are available to Forco1 and can be retained by Forco1 unless the members vote in favour of distribution;

(h) the board of directors has authority to represent Forco1; and

(i) members are excluded from any liability for any of Forco1's debts or losses.

Rulings that Forco1 will be considered a corporation and that the ownership interests in it will be shares. (The summary noted that it was not necessary that ownership interests be divided into units.)