I like dividend caps on fixed-value shares. I’ve complained before about the odour emanating from shares that are entitled to unlimited dividends but that are redeemable and retractable for a fixed amount. The CRA seems to smell something too, in technical interpretation 2016-0626781E5.
The CRA was asked to consider a scenario in which Opco had authorized two classes of shares, namely ordinary common shares and “Class B preferred shares” that were redeemable and retractable for the amount paid for them on issue and that were entitled to unlimited dividends. The directors had the discretion to sprinkle dividends as between the common shares and the Class B preferred shares. Mr A owned all of the common shares of Opco with a fair market value of $1 million. What would happen if Mrs A subscribed for a Class B preferred share for $1.00 and then Opco purported to pay a dividend to her of $100,000? The CRA responded as follows:
The tax consequences of the subscription of the Class B preferred share by Mrs. A would depend, among other things, on the fair market value of such shares upon subscription.
It is possible that, after a comprehensive review and analysis of the relevant facts such as agreements between the parties, the objective of the tax planning/reorganization and the intent of the parties (express or implied) to use the discretionary dividend feature to pay out dividends, one could take the position that an economic advantage is being conferred by Opco to Mrs. A as the holder of the Class B preferred share. In such circumstances, we could conclude that subsection 15(1) applies upon the issuance of the Class B preferred share, particularly if the amount that is being paid by Mrs. A as consideration for the share does not represent the fair market value of such share at the time of subscription.
The rulings officer then went on to suggest that, under a Kieboom-type analysis, Mr A might be considered to have transferred property Mrs A (a right to dividends), in which case any dividends she received would be attributed to Mr A. The officer also suggested that the GAAR would need to be considered.