• Deduction for widely distributed and transitional finance shares

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    A deduction, similar to that provided for eligible finance shares, is available for dividends paid by a CFC on widely distributed finance shares. Widely distributed finance shares include shares issued by a CFC as a public issue under a preference share financing arrangement to persons who are not associates of the CFC and who have provided finance on arm's length terms. To qualify, the shareholders should have no interest in the CFC apart from ensuring repayment of the funds and regular payment of the dividends in a form which is, in effect, a substitution for interest on a loan.

    A deduction is also available for dividends paid by a CFC on transitional finance shares. Transitional finance shares are shares issued by a CFC to a related CFC and paid for by the related CFC out of funds raised by the issue of widely distributed finance shares. The transitional finance shares must be issued under similar terms to the widely distributed finance shares.

    Sunset clause

    The deduction for dividends paid on transitional finance shares is only available where the shares were issued before 12 April 1989. A sunset clause is provided so that a deduction for dividends paid on transitional finance shares is only available for dividends paid by the CFC prior to 1 July 1998.

    Diagram 1 - Operation of widely distributed finance share measures

    members of the public

    <-

    funds raised by public issue of widely distributed finance shares

    <-

    CFC A

    <-

    funds may be lent

    <-

    CFC B

    Diagram 2 - Operation of transitional finance share measures

    members of the public

    <-

    funds raised by public issue of widely distributed finance shares

    <-

    CFC A

    <-

    funds provided through share issue

    <-

    CFC B

    In each of the diagrams, a deduction is available from the attributable income of CFC A for dividends paid on its widely distributed finance shares.

    In diagram 1, CFC B is allowed a deduction for interest paid to CFC A on the loan from that company.

    In diagram 2, a deduction is available from the attributable income of CFC B for dividends paid on shares that it issued to CFC A on substantially the same terms as widely distributed finance shares issued by CFC A.

    Last modified: 05 Dec 2006QC 17522