CRA accepts that annual dividends by an SBC to a non-SBC are not an indirect transfer of property to the non-SBC by the individual who formed the SBC

An individual does an estate freeze on his small business corporation (“Opco”), so that all its common shares end up being held by a family trust, one of whose beneficiaries is “Holdco,” which is not an SBC. In order that Opco can maintain its SBC status, its earnings are annually dividended out to the Trust, which allocates them all to Holdco. CRA accepts that this annual transfer of property to Holdco does not represent an indirect transfer of property by the individual to a non-SBC (Holdco), so that s. 74.4(2) does not apply.

CRA takes a similar approach where the transaction instead is the individual incorporating his active business, the Holdco subscribing for a separate class of discretionary-dividend shares of the new SBC, and the new SBC annually paying dividends to Holdco on its shares, i.e., CRA again generally considers that this does not represent an indirect transfer of property by the individual to Holdco.

Neal Armstrong. Summary of 11 December 2015 T.I. 2015-0601561E5 F under s. 74.4(2).