Digests

Canada v. Citibank Canada

A-73-01

2002 FCA 128, Malone J.A.

5/4/02

19 pp.

Appeal from Tax Court of Canada (T.C.C.) decision ([2001] 2 C.T.C. 2260) allowing Citibank's appeal against assessment of income tax for 1990 taxation year--In 1990 Citibank acquired 25 "cumulative redeemable perpetual first preference shares" in capital stock of B.C. Gas Inc. at $500,000 each, and 10 "cumulative redeemable convertible auction perpetual first preferred shares, series C" in capital stock of Le Groupe Vidéotron Ltée at $1,000,000 each--At end of five-year initial term, B.C. Gas shares could be converted into common shares in accordance with formula, whereby initial share purchase price divided by greater of $1 and current market price per common share--Thus when right to convert exercised, holder entitled to common shares that at time of conversion had same market value as face value of preferred shares--Same conversion formula for Vidéotron shares--In 1990 Citibank included dividends received on shares in income, deducted amount equal to dividends under Income Tax Act, s. 112(1)--Minister denied deduction on ground preference shares "term preferred shares" excepted from normal deduction under s. 112(1)--Asserting conditions attached to preference shares granted Citibank right to convert such shares into common shares at ratio set at time of conversion, thus "guaranteeing" Citibank would receive common shares equal in value to fixed dollar amount without regard to market fluctuations, thus creating level of protection against loss-- According to Minister, if conversion formula such that value of preference shares rose, fell with common shares, then preference shares not investment in "term preferred shares" taxed by s. 248(1)--Definition of "term preferred share" in s. 248(1): share of class of capital stock of issuing corporation if, under terms or conditions of share, issuing corporation providing any form of guarantee, security or similar indemnity or covenant with respect to share--T.C.C. applied Québec (Communauté Urbaine) v. Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3 to decide whether disputed words have ordinary meaning or more technical meaning--Held definition of "term preferred share" applies to relatively small community of sophisticated taxpayers, including publicly listed companies, financial institutions--Applied more technical meaning derived from law applicable to commerce, publicly listed companies to conclude conversion formulae falling short of any form of guarantee--Appeal dismissed-- T.C.C. correctly applied interpretive directive in Bon-Secours: interpretation of tax legislation following ordinary rules of interpretation--Once ambiguity established, legislative provision should be given strict or liberal interpretation depending on purpose underlying provision--Purpose identified in light of context of statute, its objective, apparent legislative intent--Definition of "term preferred share" designed to combat particular activity prevalent among specific actors in specific setting, i.e. financing transactions between small group of specified financial institutions as defined in s. 248(1), and corporations unable to utilize interest deduction provisions--Arising from narrow, particular context, and applies to specific and sophisticated segment of taxpayers--T.C.C. correct to conclude legal or commercial understandings of disputed words appropriate contexts in which to interpret them--Words "any form of", "similar" in s. 248(1)(a)(iii) not indicating words "guarantee, security or indemnity" to be given broad, generic meaning --S. 248(1)(a)(iii) not contemplating guarantee may be provided by issuer--Parliament intending guarantee, which can only be given by person other than principal obligee, could be given only by "any other person or partnership"--"Covenant" more general, but scope limited by statutory context: must be promise similar to guarantee, security or indemnity, common feature of which that protections against loss--Parliament intended to tax debt arrangements--Present arrangement more closely resembling capital investment than debt financing arrangement--If after conversion, price of Citibank's shares falls, Citibank losing part of investment with no other avenue for recovery-- Converse equally true--Balance weighing in favour of viewing transaction as share purchase financing--Instruments not constituting any form of guarantee, security of similar indemnity or covenant--Minister's argument ignoring commercial context, and would deem Citibank conversion formula to be impermissible simply because Minister viewing possibility of Citibank's recovery as being better than under another model--No such limitation can reasonably be attributed to words in definition--Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 112, 248 "term preferred share".