The CRA has previously stated that a deemed dividend arising on the redemption of a taxable preferred share (TPS) for a “specified amount” will not be an excluded dividend for the purposes of Part VI.1 of the Income Tax Act (Canada) where the amount for which the share was issued was specified by a formula or where the amount actually paid on redemption exceeds the specified amount. The CRA, however, stated that only the excess would not qualify as an excluded dividend.
Assume that a share with a redemption amount of $100 is issued for property that is supposedly worth $100. What happens where a price adjustment clause (PAC) in the share’s provisions is triggered to adjust the redemption proceeds payable for the share? In technical interpretation 2016-0634551E5 (May 4, 2016), the CRA stated that an increase does not change the status of the “original” deemed dividend (it is still an excluded dividend). The excess will not be an excluded dividend, however. A decrease will mean that the entire deemed dividend was not an excluded dividend.
Marlene Cepparo, “TPS Price Reduction May Eliminate Excluded Dividend” Canadian Tax Highlights 24:11 (Nov 2016).
