Manu Kakkar and Marissa Halil, in “Subsection 55(2): The CRA’s Recent Positions” Tax for the Owner-Manager 16:1 (January 2016), provide a useful summary of the CRA’s pronouncements on 55(2) at the Tax Foundation conference.
- The CRA is concerned that deliberately triggering 55(2) is not GAARable in light of the jurisprudence. It has relayed this concern to Finance.
- The results of a lumpy dividend should not be confused with the purpose of the dividend. It is the latter that is relevant to 55(2.1). What factors should be considered in assessing “purpose”? The CRA listed the following:
- What does the taxpayer intend to accomplish with such a reduction in value?
- How will such a reduction in value be beneficial to the taxpayer?
- What actions did the taxpayer take in connection with the reduction in value?
- Typically, the disposition of a directionary dividend share does not trigger a gain or a loss, and so such a share does not have safe income on hand.
- “Lumpy” dividends paid for creditor-proofing purposes—a dividend paid in excess of safe income that is then loaned back to Opco—will be subject to 55(2).
The authors advise as follows:
Two main lessons can be drawn from the CRA’s comments:
- Practitioners should document the purpose of every intercorporate dividend payment based on the facts of that transaction.
- In the event that a lumpy or unusual dividend is paid and the stated purpose is not clear or has intentionally not been documented, a detailed calculation of safe income on hand should be maintained in order to avoid the application of subsection 55(2). It may be advisable to update the calculation annually so that the required information is easily available if an unusual dividend is to be paid in the future.
The latter advice only goes so far. In some cases at least, documenting the purpose of a dividend will not obviate the need for a safe income calculation. The documentation might be merely self-serving or not credible to the CRA, in which case a safe income calculation will be needed regardless of the documentation.
