Retractable preferred shares ("Rollover Preferred Shares") of a CCPC (“Subco”) held by a public corporation (“Pubco”) which had ceased to be related to Subco were redeemable for their redemption price, plus a premium. The redemption price of the shares, which were short-term preferred shares, was set at the fair market value of the assets (transferred on a rollover basis to Subco) in consideration for which they were issued, which originally had been set at an amount of $2M, but was subsequently reduced by agreement with CRA and pursuant to a price adjustment clause to $1M. Rollover Preferred Shares then were redeemed based on the reduced FMV of $1M plus the premium, giving rise to deemed dividends in the same amount, given the shares’ nominal ACB and PUC.
In finding that s. 191(4) would not apply to exclude $1M of the deemed dividend from Pt. VI.1 tax, CRA stated:
[i]n order for an amount to be effectively and validly specified as an amount in respect of a share for purposes of subsection 191(4), that amount must, inter alia, be expressed in dollars, not be determined by formula, and not be subject to subsequent change. …
… [T]he price adjustment clause … reduce[d] the redemption value of the Rollover Preferred Shares from $2,000,000 to $1,000,000… . [S]ubsection 191(4) would not apply … on the basis that no amount was actually and validly designated in respect of each of the Rollover Preferred Shares on the transfer of assets by Pubco to Subco, or on the basis that the amount originally designated in respect of each of those shares would exceed the fair market value of the assets transferred by Pubco to Subco.
Note that by virtue of subparagraph 191(4)(d)(ii), it would not be possible to claim that the dividend paid on the redemption of a Rollover Preferred Share would be deemed to be an "excluded dividend" for the purposes of Part VI.1 by virtue of the fact that the agreement for the redemption of such a share specified an amount in respect of the share. Indeed, the Rollover Preferred Shares would be "taxable preferred shares" immediately prior to the concluding of the redemption agreement.