Redeemable preferred shares: Accounting proposal could complicate estate tax plans

In this Tax Blog post, Gabe Hayos, vice-president, Taxation, CPA Canada, notes that a proposed change by the Accounting Standards Board (AcSB) in the context of private enterprises, would eliminate the ability to present redeemable preferred shares as equity.

The Accounting Standards Board (AcSB) is proposing a change1  in the context of private enterprises that would eliminate the ability to present redeemable preferred shares as equity that is currently allowed in specified circumstances. The change could significantly alter the financial statement positions of the issuing company under Accounting Standards for Private Enterprises.

Specifically, the AcSB’s October 2014 exposure draft proposes to eliminate the special exception that applies to such shares issued in a tax planning arrangement (TPA) under specific sections of the Income Tax Act, such as an estate freeze done as part of a business transfer.

At a meeting of stakeholders, including members of CPA Canada’s tax committees, AcSB staff shared the view that the current presentation of redeemable/retractable2  preferred shares as equity when issued in the context of a TPA is an exception to the ordinary accounting treatment of such financial instruments as debt. In the AcSB staff’s primary view, the exception is no longer justified: Users’ understanding has evolved, and so there is no longer a concern that users – generally, lenders – would misunderstand the character of redeemable preferred shares if they were presented as liabilities in the context of these TPAs.

Additionally, the AcSB has become aware of cases where parties may have relied on this exception inappropriately in other arrangements, such as management buy-outs, stock compensation plans and venture capital financings.

Despite the retraction feature of such shares, which is generally added to avoid adverse income tax issues, some tax practitioners would argue that preferred shares issued in a TPA are more in the nature of equity than debt for several reasons:

  • No third party would invest in such shares because the common share equity is typically only nominal.
  • These companies do not typically have the liquidity to actual redeem or retract the shares.  
  • Due to lack of liquidity, corporate solvency requirements would often restrict the company’s ability to redeem/retract the shares. No such rules exist for the payment of a true liability.
  • TPA shares normally lack any expectation of a return beyond repayment of the “principal” and commonly anticipate a long repayment period, with no return or growth expected.

Further, some tax practitioners believe that, if the change is implemented, a post-TPA transaction balance sheet could be inconsistent and potentially misleading. As an alternative for addressing inappropriate uses of the exception, the accounting standard could be further refined to limit the exception for redeemable preferred shares to the purpose intended by the exception.

The comment period for the exposure draft closes on January 15, 2015.


Do you agree with the AcSB that financial statement users (e.g., lenders) would understand the financial statement implications of this change in presentation? Are there other issues that could arise for business owners and transferees if the proposal is implemented?

Post a comment below or email me directly.

CPA Canada’s Tax Blog is designed to create an exchange of ideas on tax policy and practice developments and issues and their impact on Canadian accountants who practise tax. Comments received can provide helpful input to the public interest advocacy positions developed by the Chartered Professional Accountants of Canada.

1 The change would amend paragraph 3856.23 of the CPA Canada Handbook – Accounting, Part II Accounting Standards for Private Enterprises.
2 The “retraction/retractable” feature of TPA shares entitles the holder to initiate a requirement for the corporation to buy back the shares. The “redemption/redeemable” feature entitles the corporation to initiate buyback of the shares.




About the Author

Gabe Hayos, FCPA, FCA, ICD.D

Vice-president, Taxation, CPA Canada