TEI comments on repeal of term preferred share rules.

• Position: Tax Executives Institute - Canada

March 11, 9004

On March 11, 2004, Tax Executives Institute submitted the following letter urging the Canadian Department of Finance to introduce legislation repealing the Term Preferred Share provisions of the Canadian Income Tax Act. The letter was prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is Monika M. Siegmund of Shell Canada Limited. Contributing to the development of TEI's comments were Julie Muirhead and David M. Penney of General Motors of Canada Limited.

During a Department of Finance--Tax Executives Institute (TEI) Liaison Meeting, the merits of eliminating the Term Preferred Share (TPS) and related rules (such as the guaranteed preference and collateral preference rules) from the Income Tax Act (the "Act") were discussed. On behalf of TEI, I am pleased to follow-up on those discussions by submitting the following comments and recommendations for your consideration.

Background

Tax Executives Institute is the preeminent international association of business tax executives. The Institute's 5,400 professionals manage the tax affairs of 2,800 of the leading companies in Canada, the United States, and Europe. Canadians constitute 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our eight geographic regions, and must contend daily with the planning and compliance aspects of Canada's business tax laws. Our non-Canadian members (including those in Europe) work for companies with substantial activities in Canada. In sum, TEI's membership includes representatives from most major industries including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial services; telecommunications; and natural resources (including timber and integrated oil companies). The comments set forth in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

Recommendation

The Term Preferred Share (TPS) rules impose significant restrictions on the design of Canadian equity instruments and reduce the depth and vibrancy of Canada's capital markets. Moreover, the TPS rules are redundant with other rules in the Act affecting preferred shares, increase the cost of preferred-share financing over debt financing, and add significant complexity to ordinary business transactions. Consequently, TEI recommends that the TPS rules be...