Manu Kakkar, Alex Ghani and Boris Volvofsky, in “Corporate Attribution: Refreeze May Cause Unsolvable Corporate Attribution Problem” 18:3 Tax for the Owner-Manager (July, 2018), argue that a refreeze at a lower value does not reduce the outstanding amount for the purposes of section 74.4 of the Income Tax Act (Canada). As a result, if the refreeze shares are later redeemed, there is a “phantom” outstanding amount on which a 74.4 deemed income amount must be calculated. The corporate issuer, however, can no longer pay dividends to the freezor to reduce or eliminate the deemed income.
Update November 14, 2020: The CRA has recently confirmed this result. See the response to question 10 at the 2020 Canadian Tax Foundation Roundtable.
