Andrew Coates, Associate, Gowling WLG (Canada) LLP

The potential tax implications of estate trustees finding themselves holding taxable preferred shares (“TPS“) owned by a deceased and the “substantial interest” exception for Part VI.1 tax was explored previously in the March 2, 2021 post, but TPS is a complicated subject so we will discuss another of the exceptions in today’s post: the “specified amount” exception.

As a refresher, TPS is defined broadly in subsection 248(1) of the Income Tax Act (Canada) (the “Act”) to capture most preferred shares having the following attributes:

• the dividend is fixed, limited to a maximum, or not less than a minimum;
• on dissolution, redemption, acquisition, or other cancellation the liquidation entitlement is fixed, limited to a maximum, or not less than a minimum; and
• the share is convertible or exchangeable (unless not exchangeable to another security that would not otherwise be a TPS).

Subsection 191.1(1) of the Act imposes a 25% tax (“Part VI.1 tax”) on the amount of a dividend paid by a taxable Canadian corporation on TPS unless certain exceptions apply. The “specified amount” exception is one of three exceptions that exempts the application of Part VI.1 tax.

Subsection 191(4) of the Act contemplates situations where TPS are redeemed, acquired or cancelled by a corporation. When a taxable Canadian corporation repurchases its shares, subsection 84(2) or (3) deems a dividend to have been paid by that corporation equal to the repurchase amount in excess of the paid-up capital of the shares repurchased. If the issued share terms, or the terms of an agreement with respect to the issued shares changed, and the terms / agreement specify an amount for which the share is to be redeemed, acquired, or cancelled and the “specified amount” does not exceed the fair market value (“FMV”) of the consideration for which the share was issued, then the deemed dividend arising on the redemption, acquisition, or cancellation is further deemed an “excluded dividend” for the purposes of Part VI.1 tax.

With respect to the “specified amount”, CRA has issued administrative interpretations in regards to the following:

• where the terms or conditions of the share or agreement must specify and actual dollar amount and where no amount has been specified, the specific amount will be the amount for which the share is to be redeemed, acquired, or cancelled;[1]
• if a price adjustment clause becomes operative after the redemption of the shares to increase the redemption proceeds to an amount in excess of the specified amount, the excess would not qualify as an excluded dividend and be subject to Part VI.1 tax. If the FMV of the TPS is less than the aggregate redemption amount, then the entire deemed dividend would be subject to Part VI.1 tax.
• the time of determination of the specified amount is also something to be considered and where freeze shares are to be issued, consideration should be given to whether to use a fixed value for each such share (i.e. $1.00, $100.00 etc.) or a formula (i.e. the value of property received less any boot).  The CRA has noted that a redemption amount that is fixed later (for example because the value of the shares to be issued was not known at the time of the filing of the Articles of the corporation), that it may not qualify in the determination of a specified amount. [2]

For estate trustees finding themselves having to deal with TPS as part of the deceased’s property, it is worth the estate administration expense to retain proper legal and accounting tax advisors to avoid the minefield of Part VI.1 tax.

[1] See CRA document number 9309585, “Part IV.1 Tax” dated April 16, 1993.

[2] See CRA document rrrr349, May 15, 1990 and also a rebuttal of the CRA position by Joan Jung in her excellent paper The Taxable Preferred Share Rules and the Private Corporation