2015-0572201C6 2015 STEP Q3 Redeemable Preferred Shares and 18(4)

Principal Issues: Whether the classification of redeemable preferred shares in the context of the application of the thin capitalization rules under subsection 18(4) of the Act is affected by the accounting classification?

Position: The legal form of a particular financial instrument, and not its accounting treatment, governs the classification as either debt or equity for income tax purposes.

Reasons: Consistent with long standing position.

Author: Storr, Keely
Section: 18(4) of the ITA

STEP CRA Roundtable – June 18, 2015

Question 3.  Redeemable Preferred Shares and subsection 18(4)

The CRA has previously commented that it is the legal form of the particular financial instrument, not its economic substance, that will usually determine its income tax treatment. As a result, redeemable preferred shares would be treated as equity irrespective of their accounting classification when applying the “thin-capitalization” rules under subsection 18(4). (Technical Interpretation 9619120).

Can the CRA please comment on whether this position continues to apply?

CRA Response

It continues to be the position of the CRA that the classification of a financial instrument (e.g. a redeemable preferred share) as debt or equity for the purposes of subsection 18(4) will be based on its legal form regardless of its accounting classification.

Keely Storr
2015-057220

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