Principal Issues: [TaxInterpretations translation] Did the fact that the Corporation made a modified Dutch auction issuer bid to purchase its common shares for cancellation and that agreements resulting therefrom were entered into with certain shareholders who tendered their shares to the bid result in the Corporation's common shares becoming STPSs or TPSs?
Position: No.
Reasons: Exceptions set out in subparagraphs (a)(i) and (e)(i) of the definition of STPS and paragraph (f) of the definition of TPS in subsection 248(1). The purchase price of the shares did not exceed the FMV of the Corporation's common shares at the time the agreements were entered into or at the time the shares were acquired.
March 30, 2010
MONTÉRÉGIE RIVE-SUD TSO HEADQUARTERS Nathalie Girard Income Tax Rulings Directorate Technical Advisor Validation & Enforcement Division Guy Goulet, CA, M.Fisc. 1247-447 2010-035439
Request for interpretation - subparagraph 191.1(1)(a)(i)
This is in response to your memorandum of January 15, 2010, requesting our comments on the application of Part VI.1 tax pursuant to subparagraph 191.1(1)(a)(i) in the Particular Situation described below.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Particular Situation:
Our understanding of the Particular Situation you have submitted to us is as follows:
1. XXXXXXXXXX. (the "Corporation") is a taxable Canadian corporation and a public corporation (within the meaning assigned by subsection 89(1)) whose shares are listed on the Canadian XXXXXXXXXX stock exchange.
2. On XXXXXXXXXX , the Corporation's Board of Directors authorized an issuer bid to purchase for cancellation up to a maximum of XXXXXXXXXX dollars of its common shares at a price between $XXXXXXXXXX and $XXXXXXXXXX per share pursuant to a modified Dutch auction issuer offer. The offer to purchase for cancellation expired on XXXXXXXXXX.
By virtue of the modified Dutch auction filing procedure (Variable Dutch Auction), shareholders could choose, within a specified range, the price at which each shareholder was willing to sell all or part of the common shares held by the shareholder. At the expiry of the offer, the Corporation selected the lowest purchase price that allowed it to purchase up to $XXXXXXXXXX of shares. Shares deposited at or below the purchase price were redeemed at the purchase price subject to a prorated calculation if the total cost of redeeming all such common shares exceeded $XXXXXXXXXX.
The closing price of the Corporation’s shares on the XXXXXXXXXX Exchange was $XXXXXXXXXX on XXXXXXXXXX, immediately prior to the announcement of the issuer bid. From XXXXXXXXXX to XXXXXXXXXX, the price of the Corporation's shares on the XXXXXXXXXX Exchange varied between $XXXXXXXXXX and $XXXXXXXXXX.
3. On XXXXXXXXXX , the Corporation published the results of its modified Dutch auction offer. Based on the final depositary count under the offer, XXXXXXXXXX common shares had been deposited. Pursuant to the offer, the Corporation fixed the purchase price at $XXXXXXXXXX per common share, allowing it to take up the maximum number of common shares deposited in response to the offer at an aggregate purchase price of approximately CDN$XXXXXXXXXX. Following odd lot purchases, the common shares were taken up on a pro rata basis such that approximately XXXXXXXXXX% of the common shares deposited by shareholders at or below the purchase price of $XXXXXXXXXX per share were purchased for cancellation, being XXXXXXXXXX common shares for a total cost of approximately $XXXXXXXXXX.
The depositary promptly returned to their holders those shares that were not properly deposited. The depositary promptly paid for shares accepted for purchase under the offer. The number of shares that the Corporation accepted for purchase under the offer represented approximately XXXXXXXXXX% of its common shares outstanding at that time.
4. The paid-up capital ("PUC") of the Corporation's common shares was $XXXXXXXXXX per share immediately prior to the share repurchase. The deemed dividend under subsection 84(3) was the following amount:
| Per share | Total | |
| Repurchase price | $XXXXXXX | $XXXXXXX |
| PUC | $XXXXXXX | $XXXXXXX |
| Deemed Dividend | $XXXXXXX | $XXXXXXX |
5. The Corporation filed its income tax return for its taxation year ending on XXXXXXXXXX within the time prescribed by the Act.
6. Subsequently, the Corporation filed an amended income tax return for the taxation year ending on XXXXXXXXXX. In this amended return, the Corporation took the position that the common shares redeemed were short-term preferred shares ("STPS") as defined in subsection 248(1). Consequently, the Corporation has calculated a tax payable under Part VI.1 of the Act on the deemed dividend paid on the STPS. It also claimed an amount as a deduction in computing its taxable income by virtue of paragraph 110(1)(k) in respect of tax payable for the year under Part VI.1.
Your Questions:
You asked us whether you should accept the Corporation's proposed changes and issue a notice of reassessment accordingly for the taxation year ending on XXXXXXXXXX. In addition, you wish to know whether the fact that the Corporation made a modified Dutch Auction issuer bid to purchase for cancellation its common shares and that agreements resulting therefrom were entered into with certain shareholders who tendered their shares to the offer resulted in the Corporation's common shares becoming STPSs or TPSs.
Our Comments:
Where, in a taxation year, a taxable Canadian corporation pays taxable dividends (other than excluded dividends) on taxable STPSs or taxable preferred shares ("TPSs"), Part VI.1 tax may be payable for the year pursuant to subsection 191.1(1). The terms "STPS" and "TPS" are defined in subsection 248(1).
STPS:
In general, the definition of STPS includes shares for which the holder may require, under the terms and conditions of the share or any agreement relating to the share, its redemption, acquisition, or conversion into a STPS, or a reduction of its PUC within a short period (5 years) after the issue or deemed issue of the share. For the purposes of this definition, an obligation to acquire a share under an agreement will be disregarded in two specific situations set out in clauses 248(1)(a)(i)(A) and 248(1)(a)(i)(B).
The exception in clause 248(1)(a)(i)(A) is for situations where a share is to be acquired within 60 days after the day on which the agreement was entered into, that does not exceed the greater of the fair market value (“FMV”) of the share at the time the agreement was entered into, and the fair market value of the share at the time of the acquisition. In both cases, the FMV of the share must be determined without reference to the acquisition agreement (the "60-Day FMV Exception").
The exception in clause 248(1)(a)(i)(B) is for situations where an agreement provides that a person will acquire a share for an amount that does not exceed the FMV of the share at the time of the acquisition, determined without reference to the agreement (the "FMV Exception").
Finally, where at any particular time the terms or conditions of a share are modified by agreement, paragraph 248(1)(e) deems the share to have been issued at that time and to be a STPS from that time until such time as it is reasonable to expect that, as a consequence of the agreement, the issuing corporation or a person related to it will no longer acquire the share or reduce the paid-up capital in respect of the share. For purposes of the deeming provisions in paragraph 248(1)(e), the obligation to acquire a share under an agreement will not be considered in the situations described in clauses 248(1)(e)(i)(A) and 248(1)(e)(i)(B) (60-Day FMV Exception and the FMV Exception).
TPS:
Furthermore, a share will generally qualify as a TPS where, by reason of the terms or conditions of the share or any agreement in respect of the share, it may reasonably be considered that:
- The "dividend entitlement" in respect of the share is either fixed or limited to a maximum,
- The "liquidation entitlement" in respect of the share is either fixed, limited to a maximum, or established to be not less than a minimum,
- The share is convertible into a TPS, or
- The share contains a guarantee agreement (loss limitation).
For the purposes of this definition, an agreement to acquire a share under an agreement will be disregarded in two specific situations set out in subparagraph 248(1)(f)(i) "60-day FMV Exception" and subparagraph 248(1)(f)(ii) "FMV Exception".
After analyzing the Particular Situation, we are of the view that the common shares of the capital stock of the Corporation were neither "STPSs" nor "TPSs" as defined in subsection 248(1) at the time of the payment of the deemed dividend. In particular, it is our view that by virtue of the exceptions in subparagraphs (a)(i) and (e)(i) of the definition of STPS and paragraph (f) of the definition of TPS in subsection 248(1), the Corporation’s public offer to purchase its shares for cancellation under a modified Dutch auction and the agreements entered into on XXXXXXXX with certain shareholders who tendered their shares in response to the offer did not, in themselves, result in the Corporation’s common shares becoming STPSs or TPSs. Furthermore, we are of the view that the purchase price per share determined in these agreements to be $XXXXXXXX did not exceed the FMV of the Corporation's common shares at the time these agreements were entered into or at the time the shares were acquired. Consequently, we are of the view that the dividend deemed to arise on the purchase for cancellation on XXXXXXXXXX by the Corporation of XXXXXXXXXX common shares of its capital stock was not subject to Part VI.1 tax.
Access to Information
For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that our comments are of assistance.
Best regards,
Ghislain Martineau
Section Manager
Financial Industries and Exempt Entities
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.