Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Concerns with the treatment of dividends from preferred shares under the Income Tax Act and how such treatment relates to the XXXXXXXXXX Preferred Securities.
Position:
The Preferred Securities are unsecured junior subordinated debentures of XXXXXXXXXX , bearing interest at XXXXXXXXXX percent per annum. Therefore, the payments received constitute interest income and not dividend income.
Reasons:
The Preferred Securities are debentures of XXXXXXXXXX and not preferred shares.
Signed on April 19, 2002
XXXXXXXXXX
Dear XXXXXXXXXX:
The Honourable Elinor Caplan, Minister of National Revenue, has asked me to reply to your letter of March 2, 2002, concerning the treatment of dividends from preferred shares.
Equity securities such as common and preferred shares are ownership claims on a corporation. Conversely, debt securities such as bonds and debentures represent creditor claims in that the borrower has a fixed obligation and usually an interest obligation to the holders of the debt securities.
Typically, a Canadian Originated Preferred Security (COPrS) such as the one described in your letter, involves a loan of a principal amount that bears interest at a stated rate and for a specified term, and which is evidenced by a preferred security issued by the borrower and is therefore a debt security.
In this regard, the XXXXXXXXXX COPrS are unsecured junior subordinated debentures of XXXXXXXXXX. Each security represents a XXXXXXXXX . Therefore, the payments received on the your preferred securities constitute interest income, which must be included in computing your income in the taxation year in which such amounts are received or receivable.
I am enclosing, for your information, a press release from XXXXXXXXXX. that describes the offering of the preferred securities and clearly indicates that these are debt and not equity securities. In this regard, since the information provided by XXXXXXXXXX is correct regarding your preferred securities, a directive to all financial institutions is not warranted.
I appreciate the opportunity to address your concerns.
Yours sincerely,
Bill McCloskey Assistant Commissioner Policy and Legislation Branch
Attachment
Norine Storry
957-3499
March 25, 2002
2002-012867