31 July 1990 Income Tax Severed Letter ACC9367 - Definition of "Short Term Preferred Share"

24(1)                 5-900431
                                               C. Robb
                                               613-957-2744
                                               EACC9367

Attention:           19(1) 

July 31, 1990

Dear Sirs:

Re: Definition of "short term preferred share" Subsection 248(1) of the Income Tax Act (Canada)(the "Act")

We are writing in response to your letter of April 11, 1990 in which you requested our views concerning the application of paragraph (h) of the definition of short-term preferred share (the "Definition") contained in subsection 248(1) of the Act.

                              24(1)

                              24(1)

The facts in your letter appear to relate to specific proposed transactions. If this is the case, your request should take the form of a request for an advance income tax ruling. If the transactions are completed, their review is the responsibility of the relevant district taxation year. Although we cannot provide confirmation with respect to the tax consequences of specific proposed transactions in response to a request for an opinion, we have set out below our general comments on the matter you have raised.

For purposes of paragraph (h) of the Definition, it is a question of fact whether or not someone other than the corporation issuing the share or an individual other than a trust is obligated to effect any undertaking within five years after the day on which the share was issued, including any guarantee, covenant or agreement to purchase or repurchase the share. Where someone other that the issuer corporation or an individual other that a trust is required to effect an undertaking subsequent to the five year period referred to above, such an undertaking would not be one described in the preamble of paragraph (h) of the Definition. In our opinion, an undertaking would be effected for purposes of the Definition at the time when it can be enforced against the person making the undertaking.

Where it is established that an undertaking, including any guarantee, covenant or agreement to purchase or repurchase a share is effected within the five year period referred to in the preamble of paragraph (h) of the Definition, it remains to be determined if the undertaking is for the purpose described in subparagraph (h)(i) of the Definition. This purpose test is necessarily a question of fact to be determined by reference to all of the circumstances of the case. For example, it is difficult to imagine a case where a controlling shareholder would provide a warranty referred to in the preamble for any purpose other than that described in subparagraph (h)(i). Accordingly, a share issued in such conditions would ordinarily be considered a short-term preferred share.

The opinions in this letter are provided in accordance with the practice described in paragraph 24 of Information Circular 70-6R.

Yours truly,

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch