The CRA has said that GAAR might apply to a deemed dividend otherwise exempt under 55(3)(a) where the purpose is to increase the cost of property (55(2.1)(b)(ii)(B)). Is that right?
55(3)(a) was amended to be applicable only in respect of the redemption of shares in order to prevent the multiplication of tax attributes. What about where a 55(3)(a) increases the cost of property.
The abuse, according to the CRA, arises from the fact that paragraph 55(3)(a) makes it possible to avoid the purpose test in clause 55(2.1)(b)(ii)(B) and increase the cost of a shareholder’s property through a tax-free dividend. However, it seems that such a result actually respects the logic underlying the law. The government is exempting deemed dividends from the purpose test and instead is imposing a results test on them (paragraph 55(2.1)(b)). Paragraph 55(3)(a) replaces the purpose test and in another way handles abusive situations through triggering events and series of transactions (see “Mise à jour sur le paragraphe 55(2) de la Loi de l’impôt sur le revenu,” in APFF Congrès 2017, 1-38, at section 2.1). Dividends that are protected by paragraph 55(3)(a) always produce a result that the purpose tests are specifically designed to avoid. A tax-free dividend always reduces the capital gain on share. It always increases the cost of property of the dividend recipient, given that the ACB of the amounts obtained always exceeds the ACB of the redeemed shares. Considering that paragraph 55(3)(a) is useful only in such situations, is it really abusive to invoke it in those situations?
In my view, using paragraph 55(3)(a) in circumstances in In my view, using paragraph 55(3)(a) in circumstances in which subsection 55(2) otherwise would have applied does not defeat the purpose of paragraph 55(3)(a) and does not constitute an abuse within the meaning of GAAR. By raising the spectre of GAAR, the CRA makes the application of paragraph 55(3)(a) hazardous even for routine share redemptions. A clarifying statement from the CRA would be welcome.
Éric Hamelin “Paragraph 55(3)(a): A Safe Harbour for Related-Party Dividends or a GAAR Trap?” 20:2 Tax for the Owner-Manager (April 2020)
