In applying the association rules in subsection 256(1) of the Income Tax Act (Canada), one can ignore shares of a specified class as defined in subsection 256(1.1). The CRA has said the following about that definition.
Regarding the requirements in subsection 256(1.1) relating to dividends:
If, for example, we consider certain preferred shares which are redeemable at $100 per share, being the amount of the consideration for which the shares were issued, at a time when the prescribed rate of interest was 6%, generally, the requirement that the dividend be fixed in amount or rate will be met where the terms or conditions of the shares specify that the annual dividend will be $6.00 per share or 6% of the redemption amount. This requirement will not, however, be satisfied where the terms or conditions of the shares provide that the holders are entitled to dividends at a rate to be determined by the board of directors at the time the dividend is declared provided that the rate of such dividends does not exceed 6% (the prescribed rate at the time that the shares were issued) of their redemption price. [From technical interpretation 9309595 dated July 8, 1993.]
Regarding the requirements relating to the redemption amount of a share and its relationship to the consideration for which the shares is issued:
Our opinion is that where a share has been issued as a stock dividend, the consideration for which the share was issued would be NIL, which is relevant in determining whether the conditions in paragraphs 256(1.1)(c), (d) and (e) of the Act, which refer to “an amount equal to the fair market value of the consideration for which the shares were issued” are met. For example, in paragraph 256(1.1)(e) of the Act, “the amount that any holder of the shares is entitled to receive…cannot exceed the total of an amount equal to the fair market value of the consideration for which the shares were issued and the amount of any unpaid dividends thereon.” Since the redemption amount of a preferred share issued as a stock dividend would be greater than NIL, then the shares issued as a stock dividend do not meet this test and would not constitute shares of a specified class. [From technical interpretation 9605085 dated February 20, 1996.]
The CRA reaffirmed the latter position in IT-64R4 at ¶27.
