Principal Issues: Whether a share of the capital stock of a corporation would qualify as a taxable preferred share or short-term preferred share in the particular situation?
Position: General comments provided.
Reasons: Question of fact
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2012
2012 APFF CONFERENCE
Question 12
Taxable preferred share or short-term preferred share
Where it satisfies the conditions under subsection 248(1), a share qualifies as a taxable preferred share ("TPS") and /or short-term preferred share ("STPS”), as the case may be.
For example, under subparagraph 248(1)(b)(iv), a share may be a TPS because, at a particular time, a person other than the issuing corporation was obligated to effect any undertaking to purchase the share so as to ensure that any loss that the shareholder or a specified person in relation to the shareholder may sustain by reason of the ownership, holding or disposition of the share is limited in any respect, or to ensure that the shareholder or a specified person in relation to the shareholder will derive earnings by reason of the ownership, holding or disposition of the share or any other property,
By virtue of paragraph 248(1)(a), a share may qualify as a STPS by reason of an agreement providing that the issuing corporation or a specified person in relation to the corporation is or may, at any time within 5 years after the date of its issue, be required to redeem, acquire or cancel the share.
In short, by virtue of subsection 248(1), both a share under an agreement by virtue of which it must be acquired within 60 days after the making of the agreement and a share under a purchase agreement that does not contain this condition can qualify as a TPS or STPS.
Where the agreement provides for the acquisition of the share within 60 days after the day on which the agreement was entered into to acquire the share for an amount, subparagraph 248(1)(f)(i) and clause 248(1)(a)(i)(A) provide that, in determining whether the share is a TPS or a STPS, such an agreement will not be taken into account if the amount does not exceed the greater of the FMV of the share at the time the agreement was entered into and at the time of the share’s acquisition.
In the event that the agreement does not provide for the acquisition of the share within 60 days after the day on which the agreement was entered into, subparagraph 248(1)(f)(ii) and clause 248(1)(a)(i)(B) indicate that such an agreement will not be taken into account if the amount for which it is to be acquired does not exceed the fair market value of the share at the time of its acquisition.
Questions to the CRA
(a) Although the agreement provides for the acquisition within 60 days after the day on which the agreement was entered into for an amount equal to the FMV at the time of entering into the agreement, if the transaction can only be completed on the 61st day, does the share automatically become a TPS or a STPS at the end of the 60th day in the event that the acquisition is for an amount greater than the FMV of the share at the time of the acquisition?
(b) If not, when does it become a TPS or a STPS?
CRA Response
The question of whether a share constitutes a TPS and /or a STPS is relevant for the purpose of determining tax under Parts IV.1 and VI.1 of the Act.
In this respect, the definitions of TPS and STPS specify that the applicable conditions must be analyzed at the "particular time". For Part IV.1 tax purposes, the "particular time" is the time at which a corporation, receives in a taxation year, a dividend on a TPS (other than an "excluded dividend") that is deductible in computing its taxable income for the year, inter alia, by virtue of subsection 112(1). In the case of Part VI.1 tax, it is the time when a taxable Canadian corporation pays a taxable dividend, other than an excluded dividend, in a taxation year on a TPS or STPS, as the case may be.
Consequently, at the time 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 may or may not be applicable in determining if the share on which the dividend is paid or received constitutes a TPS and/or a STPS, in accordance with the circumstances.
However, such a determination requires an analysis of all facts and circumstances pertaining to a particular situation. Given that the statement in this question only briefly describes a particular hypothetical situation, it does not seem appropriate for us to comment more specifically on the application of these rules in the particular situation.
Jean Lafrenière
(613) 941-2956
2012-045417