Federal Court Of Appeal Rules That Retractable Preferred Shares Are Not “Capital” For Purposes Of The Large Corporations Tax Under Part 1.3 Of The Income Tax Act

Article by David Spiro, 2007, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Tax, June 2007

In a decision released on June 11, 2007 (Attorney General of Canada v. Ford Credit Canada Limited, 2007 FCA 225), the Federal Court of Appeal held that retractable preferred shares (shares that oblige the issuer to redeem them at the request of the holder) are not "capital" for purposes of the Large Corporations Tax (LCT) that was imposed by Part I.3 of the Income Tax Act (the Act) for years prior to 2006. Although LCT was effectively repealed as of January 1, 2006, corporations and financial institutions that had issued retractable preferred shares before that date should consider challenging any assessment or reassessment that included the amount of those retractable preferred shares in capital for LCT purposes.

In this decision, the Federal Court of Appeal rejected the longstanding policy of the Canada Revenue Agency that Generally Accepted Accounting Principles (GAAP) do not displace the legal meaning of terms used in Part I.3 of the Act. This policy has been reiterated on numerous occasions by officials of the Minister of National Revenue (the Minister) and is clearly reflected in Interpretation Bulletin IT-532:

11. . . . the...