Should Redeemable-Upon-Demand Shares Be Included in Paid-Up Capital or Long-Term Debt?

On January 29, 2010, the Appeal division of the Court of Quebec determined that Credit Ford Canada Ltd. did not have to include the $1,170,000,000 worth of retractable shares issued in its paid-up capital (and thus be taxed on it) and could, instead, consider it as a long-term debt. This decision alone made a $2,416,767 difference in the tax payable by Credit Ford Canada Ltd. to the Quebec government for the 2001 year only (other contestations had been filed for the 2002 and 2003 years as well).

The appeal was mainly decided on the fact that the Quebec Taxation Act, provides that the tax on paid-up capital is imposed on a corporation based on the capital shown in its financial statements prepared in accordance with generally accepted accounting principles. Such principles consider any retractable shares issued by a corporation as a debt.

A similar decision has been rendered by the Tax Court of Canada and was confirmed by the Federal Court of Appeal on June 11, 2007.

The Quebec Court of Appeal will hear the appeal by the Quebec Deputy Minister of Revenue on September 28, 2011.

Potential Significance

The decision to be rendered will be of interest to any loan corporation that issues retractable shares from time to time (which can include banks as well as loan corporations for car or furniture companies) for it will have a huge impact on the tax that will be payable by them.

Case Information

Crédit Ford du Canada ltée c. Québec (Sous-ministre du Revenu)

QCA Docket Number: 500-09-020459-103

Hearing Date:  September 28, 2011

GAAP loan long-term debt paid-up capital Quebec Court of Appeal retractable shares shares tax

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