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Tax Alert – New Rules for DividendIf your corporation is considering paying a dividend, whether as p
reorganization or simply as a distribution to a related corporation
to be aware of the change to dividend legislation that was introdu
Budget 2015.
These proposals complicate an already-complicated area of taxation and it sho
that further uncertainty exists as the new legislation has not been passed as of
However, if passed, these changes apply retroactively to dividends paid after A
and consequently, need to be considered in your current tax planning.
Subsection 55(2) – The Old Rules
Canadian corporations have long been subject to an anti
recharacterizes certain tax-free inter-corporate dividends as capital gains. This
subsection 55(2), could apply where one of the purposes of a dividend was to s
reduce a capital gain that would otherwise be realized on a disposition at
(FMV) of any share, immediately before the dividend was paid (known as the “
test”). For example, suppose Holdco owns 100% of the shares in Opco; these
a FMV of $10,000,000 and a cost base of $5,000,000. Buyco would lik
Opco shares from Holdco; prior to the sale, Opco borrow $5 M. Opco uses tha
pay a dividend to Holdco of $5 M; the dividend reduces the FMV of the Opco s
M. Holdco now sells the shares to Buyco for $5 M, an amount equ
This strategy allows Holdco to receive proceeds of $10 M ($5 M tax
M sale proceeds) without having to claim a taxable capital gain on the sale tran
exactly this type of planning that ss. 55(2) sought to prevent.
There were exceptions to the application of ss. 55(2) under the old regime. The
avoidance rule did not apply to:
1. the portion of the dividend, if any, subject to tax under Part IV that was n
as a consequence of the payment of a dividend to a corporation;
2. the portion of the dividend, if any, paid from safe income (after
earnings);
your corporation is considering paying a dividend, whether as p
reorganization or simply as a distribution to a related corporation
to be aware of the change to dividend legislation that was introdu
complicated area of taxation and it sho
that further uncertainty exists as the new legislation has not been passed as of
s apply retroactively to dividends paid after A
and consequently, need to be considered in your current tax planning.
Canadian corporations have long been subject to an anti-avoidance rule that e
corporate dividends as capital gains. This
subsection 55(2), could apply where one of the purposes of a dividend was to s
reduce a capital gain that would otherwise be realized on a disposition at fair m
(FMV) of any share, immediately before the dividend was paid (known as the “
test”). For example, suppose Holdco owns 100% of the shares in Opco; these
a FMV of $10,000,000 and a cost base of $5,000,000. Buyco would like to purc
Opco shares from Holdco; prior to the sale, Opco borrow $5 M. Opco uses tha
pay a dividend to Holdco of $5 M; the dividend reduces the FMV of the Opco s
M. Holdco now sells the shares to Buyco for $5 M, an amount equal to both FM
This strategy allows Holdco to receive proceeds of $10 M ($5 M tax-free divide
M sale proceeds) without having to claim a taxable capital gain on the sale tran
sought to prevent.
There were exceptions to the application of ss. 55(2) under the old regime. The
the portion of the dividend, if any, subject to tax under Part IV that was n
payment of a dividend to a corporation;
the portion of the dividend, if any, paid from safe income (after-tax retain
Tax AlertTax Alert – Canada
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TAX ALERT - CANADA June 26, 2015
3. any dividend received in transactions involving only related parties; or
4. any dividend received as part of an unrelated person butterfly reorganization under
paragraph 55(3)(b).
Subsection 55(2) did not apply to dividends that reduced the FMV of a share with an
adjusted cost base equal to or greater than FMV. This led to planning
could be paid to create an accrued loss which would offset an accrued capital gain.
Although the Tax Court of Canada found this planning legitimate (D&D Livestock Ltd. V. The
Queen 2013 DTC 1251), it appears that it is precisely this pl
announced in Budget 2015.
Subsection 55(2) – The Proposed New Rules
The application of the old rules stemmed largely from the “purpose test” as described
above. Budget 2015 has added two additional purpose tests that, if answere
cause ss. 55(2) to apply; they are as follows:
1. Was the purpose of the dividend to reduce the FMV of any share?
2. Was the purpose of the dividend to increase the cost base of any property of the
dividend recipient?
The new rules also state that if one of these three purpose tests is met, and the amount of
the dividend exceeds the safe income on hand, ss. 55(2) may apply to deem the dividend to
be a capital gain.
Under these new rules, there was also an important change made to the ‘exceptions’.
related party exception (#3 as above) now applies only to deemed dividends arising on the
redemption, acquisition or cancellation of a corporation’s shares under ss. 84(3). This is a
significant change for corporations to consider as previously tax
dividends appear to now require safe income, even in related groups. Related party
reorganizations will be made more complicated by these changes and ‘ordinary’
transactions for purposes such as cash distributions, asset protection and o
changes will now be subject to safe income availability.
The changes to section 55 also impact the iss
old rules, a corporation could issue a stock dividend with a high FMV but a low paid
capital (PUC). The PUC was the amount that was considered for purposes of section 55
and as a result, these shares allowed the corporation to defer the taxation of the actual
value of the stock dividend until that time when the shares were redeemed or sold. Under
the new rules, for purposes of applying the anti
amount of a stock dividend will now be deemed to be the greater of the FMV and PUC
limiting their usefulness in share capital reorganizations.
Conclusion
Both the old rules and the new rules are complicated; however, it must be acknowledged
that the changes to the anti-avoidance legislation under section 55 proposed in Budget
2015 are considered “sweeping”. These changes may impact your corporation wheneve
you pay a dividend and it does not appear overly cautious to ad
dividends may not exceed safe income, even in related groups. The best advice is to
consult a MNP Tax Specialist and find out exactly how these rules will impact yo
corporation. This proposed legislation will apply to dividends received after April 20, 2015,
and so it is wise to address this sooner than later.
June 26, 2015
any dividend received in transactions involving only related parties; or
dividend received as part of an unrelated person butterfly reorganization under
Subsection 55(2) did not apply to dividends that reduced the FMV of a share with an
adjusted cost base equal to or greater than FMV. This led to planning whereby a dividend
could be paid to create an accrued loss which would offset an accrued capital gain.
Although the Tax Court of Canada found this planning legitimate (D&D Livestock Ltd. V. The
Queen 2013 DTC 1251), it appears that it is precisely this plan that led to the changes
The Proposed New Rules
The application of the old rules stemmed largely from the “purpose test” as described
above. Budget 2015 has added two additional purpose tests that, if answered “yes”, would
Was the purpose of the dividend to reduce the FMV of any share?
Was the purpose of the dividend to increase the cost base of any property of the
t if one of these three purpose tests is met, and the amount of
the dividend exceeds the safe income on hand, ss. 55(2) may apply to deem the dividend to
Under these new rules, there was also an important change made to the ‘exceptions’. The
related party exception (#3 as above) now applies only to deemed dividends arising on the
redemption, acquisition or cancellation of a corporation’s shares under ss. 84(3). This is a
significant change for corporations to consider as previously tax-free inter-corporate
dividends appear to now require safe income, even in related groups. Related party
reorganizations will be made more complicated by these changes and ‘ordinary’
transactions for purposes such as cash distributions, asset protection and ownership
changes will now be subject to safe income availability.
the issuance of high-low stock dividends. Under the
old rules, a corporation could issue a stock dividend with a high FMV but a low paid-up
capital (PUC). The PUC was the amount that was considered for purposes of section 55
the corporation to defer the taxation of the actual
value of the stock dividend until that time when the shares were redeemed or sold. Under
the new rules, for purposes of applying the anti-avoidance provisions under section 55, the
be deemed to be the greater of the FMV and PUC; thus
limiting their usefulness in share capital reorganizations.
Both the old rules and the new rules are complicated; however, it must be acknowledged
avoidance legislation under section 55 proposed in Budget
. These changes may impact your corporation whenever
you pay a dividend and it does not appear overly cautious to advise that inter-corporate
dividends may not exceed safe income, even in related groups. The best advice is to
and find out exactly how these rules will impact your
corporation. This proposed legislation will apply to dividends received after April 20, 2015,
and so it is wise to address this sooner than later.
