Finance is proposing to amend 55(2) and related provisions for dividends paid after April 20, 2015.
- 55(2) will contain two new purpose tests. A dividend (other than an 84(3) dividend) might be caught under the new rules if one of the purposes of the dividend is to effect (a) a significant reduction in the FMV of any share or (b) a significant increase in the total cost of properties of the recipient.
- The related-party exception in 55(3)(a) will apply only to 84(3) dividends.
- The amount of a stock dividend for the purposes of 55(2) will be equal to the greater of the PUC of the shares issued on the stock dividend and their FMV. (But the same effect might be achieved under a section 86 share reorganization, for example.)
- 55(2) could apply in respect of a share that has a FMV equal to or less than the ACB of the share.
- The Part IV tax exception will apply only if the dividend recipient does not receive a refund of the Part IV tax.
Summary of KPMG TaxNewsFlash 2015-23 dated May 27, 2015.
Some additional points (thanks to Shelley Wickenheiser):
- The changes appear intended to prevent safe income “borrowing” (per the addition of “of the share on which dividend is received” to the end of subparagraph 53(1)(b)(ii) and new paragraph 55(2.1)(c)).
- The deemed gain, if 55(2) applies, will be in respect of a disposition of “a capital property” even if the recipient has disposed of the share (cf new 55(2)(b) and old 55(2)(b)).
Note added July 13, 2015—See also Kenneth Keung, “Section 55 May Now Apply to Every Intercorporate Dividend” (July 2015) 15:1 Tax for the Owner-Manager 3-4. The author notes that the re-characterization of a dividend as a gain (rather than as proceeds) means that the deemed gain could be greater than it was under the old rules (the new rules require the recognition of a gain equal to the dividend amount less PUC rather than the dividend amount less ACB, as per the old rules). The author also suggests that the safe income safe harbour only applies if the payor shares have an accrued but unrealized gain.
