Redeemable Preferred Shares Issued in a Tax Planning Arrangement

Current Status Next Steps

Re-exposure draft being developed.

Third quarter of 2017 – Re-exposure draft to be issued.

BACKGROUND

The accounting for redeemable preferred shares issued in a tax planning arrangement, as set out in Financial Instruments, paragraph 3856.23, needs to be re-examined.

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A number of issues have arisen in respect of redeemable preferred shares. Issues include scope, reclassification and measurement.  The Accounting Standards Board (AcSB) discussed these issues and agreed that they were beyond the scope of an annual improvement. Accordingly, it agreed to undertake a separate project to address them.

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PROJECT NEWS & DECISION SUMMARIES

AcSB Decision Summary – January 12, 2017
The AcSB discussed the results of field testing conducted to assess the viability of permitting a classification exception on the condition of retention of control of an enterprise. The field testing consisted of analyses conducted by assurance and tax practitioners of actual tax planning arrangements commonly executed.

In particular, the AcSB considered the following, based on the results of the field testing:

  • whether the current guidance in Section 1591, Subsidiaries, is sufficiently robust to address the characteristics of redeemable preferred shares issued in a tax planning arrangement;
  • the perspective from which control of the enterprise should be considered; and
  • other conditions that are necessary, in addition to retention of control of the enterprise.

The AcSB decided that the basis for the classification exception should be on the condition of retention of control of an enterprise and that additional guidance may be needed relating to the control assessment. In addition, the AcSB decided that other conditions are necessary in order to qualify for the classification exception.

The AcSB noted that at least some of the tax planning arrangements that meet the classification exception under the current guidance will not qualify for the exception under the proposed basis.  Accordingly, the AcSB directed the staff to obtain feedback from its Private Enterprise Advisory Committee on the effect of its decisions on current practice. At its March 21-22, 2017 meeting, the AcSB will consider the input received from the Committee. The AcSB will also begin to discuss transitional provisions.

Private Enterprise Advisory Committee Notes – December 1, 2016
The Committee discussed the status of ongoing field testing to assess the viability of applying “retention of control of an enterprise” as a condition for a classification exception. The Committee also reviewed details of one of the tax planning arrangements being analyzed by the field testing participants. Committee members provided input on the arrangement. 
Committee members provided further input into an analysis of the following issues:

  • other conditions that should be met in order for the classification exception to be permitted, in addition to retention of control of the enterprise; and
  • reclassification considerations.

AcSB Decision Summary – July 20, 2016
The AcSB continued its discussions relating to the viability of a classification exception and the conditions under which such an exception might be permitted.  In addition, the AcSB discussed when redeemable preferred shares falling within any exception should be reclassified from equity to liability subsequent to initial application of the classification exception and what information should be disclosed. The AcSB directed staff to begin field testing to assess whether the current control guidance in Section 1591, Subsidiaries, is sufficiently robust to address the various characteristics of tax planning arrangements and the additional conditions necessary in order to qualify for a classification exception.

Private Enterprise Advisory Committee Notes – June 14, 2016
The Committee discussed an analysis of the viability of a classification exception on the basis of retention of control over the enterprise.  Specifically, the Committee discussed the challenges with applying the concept of control as a condition to the various characteristics of tax planning arrangements.  

The Committee also provided further input into an analysis of the following issues for consideration:

  • the definition of tax planning arrangements;
  • conditions that should also be met in order for the classification exception to be permitted, in addition to the retention of control;
  • reclassification considerations; and
  • presentation and disclosure.

AcSB Decision Summary – May 18, 2016
The AcSB discussed an analysis of the viability of a classification exception on the basis of retention of control over the enterprise.  In particular, the AcSB discussed the potential challenges with basing the classification exception solely on control, and what further work should be done.  In that regard, the AcSB directed staff to take the time necessary to conduct further testing of the characteristics of tax planning arrangements and to identify the arrangements that would and would not meet the classification exception if it were based on retention of control over the enterprise.

AcSB Decision Summary – March 22-23, 2016
The AcSB received a summary of the additional analysis conducted relating to the scope of the classification exception and the characteristics of tax planning arrangements, as well as feedback from the Private Enterprise Advisory Committee on that analysis.  In addition, the AcSB discussed alternative bases under which a classification exception might be considered.  In that regard, the AcSB directed the staff to further explore the viability of a classification exception on the basis of retention of control over the enterprise, as advised by the Committee.

Private Enterprise Advisory Committee Notes – February 17, 2016
The Committee received an update on the additional analysis conducted relating to the scope of the classification exception and the characteristics of tax planning arrangements. The Committee also discussed possible bases for a classification exception. Specifically, the Committee discussed whether a classification exception might be restricted to:

  • estate freezes in which there is no change in control over the entity that is subject to the freeze;
  • estate freezes and roll-over transactions, by focusing the classification exception on transactions with the controlling shareholder; and
  • estate freezes that are non-reciprocal or when the only consideration exchanged is common or preferred shares that had been held by the common shareholder.

The Committee agreed to recommend to the AcSB that a classification exception on the basis of a change in control be further explored.

AcSB Decision Summary – November 24, 2015
The AcSB continued its deliberations and, in particular, discussed next steps in response to the comment letters and roundtable discussions on the Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement.”  The AcSB agreed that alternatives to the manner in which the classification exception is described in Financial Instruments, paragraph 3856.23, should be explored.  To facilitate the development of alternatives, the AcSB directed the staff to further analyze the scope of the exception and the characteristics of inter-generational transfers.

Private Enterprise Advisory Committee Notes – October 6, 2015
The Committee discussed the comments received by stakeholders in response to the AcSB’s Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement,” which was issued in October 2014. In particular, the Committee considered the respondents’ suggested amendments to Section 3856, Financial Instruments, to address the concerns raised that precipitated the proposal. Those suggestions included:

  • amending paragraph 3856.23 to remove references to specific sections of the Income Tax Act and instead restrict the use of the paragraph by describing the types of transactions to which it applies;
  • providing application guidance to support the use of judgment in determining when the paragraph is applicable and to address application issues, such as the requirement to reclassify as a liability “when redemption is demanded”;
  • adding disclosure requirements to better inform users about the nature of the arrangement that gave rise to the issuance of the preferred shares and the characteristics of those shares; and
  • allowing an accounting policy choice, as was previously permitted under pre-changeover GAAP.

The Committee discussed the possible amendments to paragraph 3856.23, including revising its scope and adding disclosure requirements.

Webinar – Redeemable Preferred Shares Issued in a Tax Planning Arrangement – Update
August 26, 2015. Tune in to this webinar on September 18, 2015 (English) or September 21, 2015 (French) to understand the views of stakeholders regarding the AcSB’s October 2014 Exposure Draft.  

AcSB Decision Summary – May 25-26, 2015
The AcSB continued discussions of respondents’ comments, including the results of the roundtable discussions with stakeholders, on the Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement.”

Many respondents noted that the Exposure Draft proposals were based on discussions with creditors and suggested that additional types of users should be consulted.  These respondents noted that other users may not understand the results of reporting redeemable preferred shares issued in a tax planning arrangement as liabilities.  In respect of its strategy for maintaining the accounting standards for private enterprises, the AcSB noted that the Invitation to Comment on its 2016-2021 Draft Strategic Plan seeks input on the other types of users of private enterprise financial statements and their information needs.  The AcSB decided to consider the results of the user outreach on the Invitation to Comment before further deliberating this issue. 

In light of the above decision, and the time needed to fully consider other issues and comments raised by respondents, the AcSB agreed that any change as a result of this project will not be published prior to January 1, 2016.  Accordingly, the AcSB decided that the effective date of any such change will be no earlier than January 1, 2018.

AcSB Decision Summary – March 18-19, 2015
The AcSB began considering responses to its Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement,” as well as the results of all roundtable discussions with stakeholders, including the additional discussions conducted in January and February 2015 with practitioners and lenders that use financial statements.

The AcSB agreed that redeemable preferred shares issued in a tax planning arrangement (as addressed in Financial Instruments, paragraph 3856.23) meet the definition of a liability.  The AcSB will consider whether there are sufficient cost/benefit considerations to retain equity treatment for certain redeemable preferred shares issued in a tax planning arrangement.

The AcSB also discussed whether further consultations with financial statement users should be undertaken.  No decisions were made on this issue.

The AcSB will continue discussions of this topic at its May 2015 meeting.

AcSB Decision Summary – January 14, 2015
The AcSB considered additional feedback received from consultations conducted in December 2014 and other sources on the Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement.” No decisions were made.

Roundtable Discussions – Stakeholders’ Views Sought on Section 3856, Financial Instruments – January 2015
December 18, 2014. The AcSB is holding roundtables to obtain input on its Post-Implementation Review of Section 3856, Financial Instruments, and on its Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement.” Register to attend a roundtable discussion to share your views.

AcSB Decision Summary – December 10, 2014
The AcSB considered the feedback received to date from the public roundtable discussions held in Vancouver and Calgary, and from other discussions with stakeholders on the Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement.”  No decisions were made. 

The AcSB encourages stakeholders to submit their comments by January 15, 2015.

Roundtable Discussions – Stakeholders’ Views Sought on Section 3856, Financial Instruments – November 2014
November 7, 2014. The AcSB is holding roundtables to obtain input on its Post-Implementation Review of Section 3856, Financial Instruments, and on its Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement.” Register to attend a roundtable discussion to share your views.

FYI Article – Accounting for Redeemable Preferred Shares Issued in a Tax Planning Arrangement
October 29, 2014. This article discusses the AcSB’s recently issued Exposure Draft regarding redeemable preferred shares issued in a tax planning arrangement, specifically for shares issued in transactions commonly known as an “estate freeze”.

Webinar – Redeemable Preferred Shares Issued in a Tax Planning Arrangement
October 17, 2014. Tune in to this webinar on November 20, 2014 (English) or November 25, 2014 (French) to learn about the AcSB’s proposed amendments to standards on redeemable preferred shares issued in a tax planning arrangement.

Exposure Draft – Redeemable Preferred Shares Issued in a Tax Planning Arrangement
October 1, 2014. The AcSB has issued an Exposure Draft that proposes to delete Financial Instruments, paragraph 3856.23, and includes a Basis for Conclusions. Stakeholders are encouraged to submit their comments, on the form provided, by January 15, 2015.

AcSB Decision Summary – July 16, 2014
The AcSB reviewed a draft exposure draft and accompanying basis material.  The AcSB expects to issue the exposure draft for comment in the third quarter of 2014 with a 90-day comment period.  The AcSB plans to make the change effective for fiscal years beginning on or after January 1, 2016, subject to comments received on exposure.

AcSB Decision Summary – May 14-15, 2014
The AcSB discussed the effect of recognizing redeemable preferred shares issued in a tax planning arrangement as liabilities.  The AcSB tentatively decided that the previously unrecognized increase in value of the business reflected by newly issued redeemable preferred shares should be presented in a separate category of equity, as set out in Equity, paragraph 3251.06.  The AcSB noted that affected entities may also have the existing option of applying Section 1625, Comprehensive Revaluation of Assets and Liabilities.

The AcSB approved a proposal to withdraw Financial Instruments, paragraph 3856.23, subject to reviewing a draft of an exposure draft and a written ballot.  The AcSB plans to make the change effective for fiscal years beginning on or after January 1, 2016, subject to comments received on exposure.

Private Enterprise Advisory Committee Notes – April 3, 2014
The Committee discussed presentation requirements related to the recognition of redeemable preferred shares issued in a tax planning arrangement as a liability.

The Committee noted that the AcSB had agreed that such redeemable shares should be classified as a liability. That liability would be measured on initial recognition at fair value. The Committee agreed to recommend to the AcSB that the resulting debit should be presented as a separate component of equity that would be reclassified to retained earnings as the preferred shares are redeemed. The Committee also recommended disclosure of a description of the transaction that resulted in the separate component of equity.

AcSB Decision Summary – March 18-19, 2014
The AcSB discussed the special treatment provided by Section 3856, Financial Instruments, for redeemable preferred shares issued in a tax planning arrangement. The AcSB considered whether the presentation requirement in paragraph 3856.23 should be retained or modified. The AcSB agreed that the redeemable shares should be classified as a liability and directed staff to perform further analysis of presentation issues associated with the redeemable shares.

Private Enterprise Advisory Committee Notes – December 10, 2013
The Committee continued its discussion on whether the simplification in Financial Instruments, paragraph 3856.23, which requires redeemable preferred shares issued in certain tax planning arrangements to be classified as equity, should be retained. The Committee will discuss this topic again at a subsequent meeting.

 Private Enterprise Advisory Committee Notes – June 18, 2013
The Committee continued its discussions on the accounting for redeemable preferred shares issued in a tax planning arrangement. The Committee requested the staff to consider alternative approaches for amending Financial Instruments, paragraph 3856.23. The Committee will continue its discussions on this topic at a subsequent meeting.

Private Enterprise Advisory Committee Notes – April 3, 2013
The Committee commenced a re-examination of the accounting for redeemable preferred shares issued in a tax planning arrangement, as set out in Financial Instruments, paragraph 3856.23.

The Committee had a preliminary discussion in respect of the cost/benefit arguments that justify equity treatment of these preferred shares. The Committee will continue its discussions on this topic at a subsequent meeting

AcSB Decision Summary – March 19-20, 2013
The AcSB approved a project to re-examine the accounting for redeemable preferred shares issued in a tax planning arrangement, as set out in Financial Instruments, paragraph 3856.23.

 

Disclaimer: This project summary has been prepared for information purposes only. Decisions reported are tentative and reflect only the current status of discussions on this project, which may change after further Board deliberations. Decisions to publish Handbook material are final only after a formal ballot process.