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Canada's Interconvertible Shares: A Puzzle

  • Author(s): Bailey, Warren
  • et al.
Abstract

Passage of the Canada Income Tax Act of 1971 permitted Canadian corporations to issue two classes of equity, one paying ordinary cash income and the other paying capital gains income. The shares are known as "interconvertible" because each share is freely convertible one-for-one into a share of the other type. Premiums paid for cash shares are consistent with the relative value of the dividends paid and with the taxation of certain investor groups. However, large premiums for some cash shares are evidence that the shares have been mispriced with respect to the conversion option.

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