In the current economic climate, the ability to reduce financing costs can make the difference between business recovery and failure. The “distress preferred share” (“DPS”) provisions in the Income Tax Act (Canada) (the “Tax Act”) present an opportunity to reduce such costs, by some 30%. At the same time, a DPS restructuring can give the lender equal or better after-tax income on its investment, without sacrificing its security and priority. In essence, the DPS rules give an interest subsidy to the borrower in difficulty through a tax break to the lender.

type Financial Services and Tax Law Bulletin - February 2009 - Reducing Financing Costs Through Distress Preferred Shares