Taxable Preferred Share

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.

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 moment 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 can or cannot as applicable apply to determine 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.

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.

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).

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.

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.

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.

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.