Her Majesty the Queen (Appellant) v. Citibank Canada (Respondent)

Federal Court of Appeal
2002 DTC 6876
April 5, 2002

(Court File No. A-73-01.)

Deductions — Dividends — Preferred shares of two publicly traded Canadian corporations ("the preference shares") acquired by corporate taxpayer, a chartered bank ("Citibank") — Minister assessing taxpayer on the basis that the dividends from the preference shares not deductible under subsection 112(1) of the Act, since such shares constituting "term preferred shares" within the meaning of subsections 112(2.1) and 248(1) of the Act — In particular, Minister taking the position that the conditions granting the holders of the said shares the right to convert to common shares at a ratio determined at the time of conversion, providing, in essence, a "form of guarantee, security or similar indemnity or covenant" within the meaning of the definition of "term preferred share" in subparagraph 248(1)(a)(iii) of the Act — Whether Minister's position justified — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 82(1), 89(1), 112(1), 112(2.1), 121 and 248(1).

Preferred shares of two publicly traded Canadian corporations ("the preference shares") were acquired by the corporate taxpayer, a chartered bank ("Citibank" ). The Minister assessed Citibank for 1990 on the basis that the dividends from the preference shares were not deduct ible under subsection 112(1) of the Act, since such shares constituted "term preferred shares" within the meaning of subsections 112(2.1) and 248(1) of the Act. In particular, the Minister took the position that the conditions granting the holders of the said shares the right to convert to common shares at a ratio determined at the time of conversion, provided, in essence, a "form of guarantee, security or similar indemnity or covenant" within the meaning of the definition of "term preferred share" in subparagraph 248(1)(a)(iii) of the Act. In allowing Citibank's appeal (2001 DTC 111), the Tax Court of Canada concluded: (a) that, applying the analysis used by the Supreme Court of Canada in Corporation Notre-Dame de Bon-Secours v. City of Quebec et al. (95 DTC 5017), [1994] 3 S.C.R. 3, the proper interpretation of subparagraph (a)(iii) of the disputed words in subparagraph (a)(iii) of the definition of "terms preferred" share in subsection 248(1) was to be found in their legal meaning imported from the specific, specialized context to which they applied; (b) that the definition of "term preferred share" applied to a relatively small community of sophisticated taxpayers, including the publicly listed companies whose shares were involved here, and including financial institutions like Citibank itself; (c) that, in their entire context, the disputed words had the more technical meaning derived from the law applicable to commerce and publicly listed companies; and (d) that, applying the textually appropriate legal definitions of guarantee, security, indemnity, and covenant, as found in Black's Law Dictionary, the conversion formulae with respect to the preference shares in this case fell short of "any form or guarantee, security or similar indemnity or convent" as required by subparagraph of the Act. The Crown appealed to the Federal Court of Appeal, arguing, in part, that the Tax Court judge had erred in applying "the narrow and most technical interpretation possible" to the disputed words, instead of interpreting those words in the broadest possible manner, and in their ordinary meaning as defined in the Oxford English Dictionary.

Held: The Crown's appeal was dismissed. The Tax Court judge had correctly applied the interpretive directive established by the Supreme Court in the Bon-Secours case, supra. Such directive (following the principle enunciated by E.A. Drieger in the Construction of Statutes, 2nd ed.) required the words of an Act to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament. It thus became necessary to canvass the purpose and intent underlying the definition of "term preferred share". This definition was clearly designed to combat a particular activity prevalent among specific actors in a specific setting, i.e., financing transactions between a small group of specified financial institutions as defined in subsection 248(1) of the Act, and corporations which were, for a variety of reasons, unable to utilize interest deduction provisions. Such definition therefore applied to a specific and sophisticated segment of taxpayers, so that the Tax Court judge was correct in concluding that the legal or commercial understandings of the disputed words were appropriate contexts in which to interpret them. Parliament intended to tax arrangements which were, in substance, debt arrangements, whereas the arrangement in the present case more closely resembled a capital investment as opposed to a debt financing arrangement, since Citibank did not receive any instrument providing for repayment. Rather, it had made a permanent contribution to the paid-up capital of the issuing corporations, and did not have any of the recourse traditionally associated with debt instruments. It merely had a right to convert its preferred shares into common shares bearing the same value at a determined date. In light of the foregoing findings, the balance clearly weighed in favour of viewing the transaction not as a debt arrangement, but as share purchase financing. In the end, therefore, Citibank was entitled to the deduction claimed, and the Minister was ordered to reassess accordingly.

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