Neal Armstrong reports on the CRA pronouncement regarding 55(5)(f) designations at the 2014 STEP Roundtable:
CRA stated that its long-standing practice “is to apply subsection 55(2) only to the excess of the taxable dividend paid on a share over the safe income on hand attributable to that share, when issuing an assessment based on subsection 55(2).” Accordingly when a corporate shareholder receives a dividend in excess of SIOH and does not make s. 55(5)(f) designations to carve the dividend up into safe income and taxable dividends, CRA will only apply s. 55(2) to the portion of the dividend in excess of SIOH – so that, by implication, the shareholder is permitted to do the same on a self-assessment basis.
Given the significantly higher rates of tax now applicable to dividends received by an individual compared to capital gains, one might prefer to trigger 55(2) deliberately so that the entire amount of an inter-corporate dividend is treated as a capital gain. The CRA seems to be saying, however, that only the portion of the dividend in excess of SIOH will be treated as a capital gain even if no 55(5)(f) designation is filed. This is despite the language of 55(2), which seems to treat the entire amount of the dividend as a gain if any portion of it exceeds SIOH. What am I missing?
Update September 15, 2015—Adam Drori, in “CRA’s (Re)interpretation of Paragraph 55(5)(f)”, Canadian Tax Focus 5:3 (August 2015), seems to confirm that I’m not missing anything: the CRA position appears to be a (perhaps unprincipled) attempt to make taxpayers pay tax at the dividend rate rather than the capital gain rate, the clear wording of 55 be damned.
Update January 4, 2016—J. Howald & K. A. S. Monaghan, “Current Issues of Interest”, 2015 Ontario Tax Conference, p 18, point out that 55(5)(f) provides that the taxpayer may make a designation, which argues against the idea that the CRA can reassess as if the designation had been made. The authors also note that the CRA position goes back to some statements made in technical interpretations from 2011-2012.
