CRA confirms that it will not apply s. 112(3) to a dividend that has been subjected to s. 55(2) and discusses animating policy considerations
In its published comments on its further conclusions on various questions posed to it on the s. 55(2) rules, CRA provided some more detail than in its oral presentation at the 2018 Annual Conference. For instance, after describing the stop-loss rule in s. 112(3), CRA stated:
Denying a loss on a share that is caused by a dividend that has been subject to tax under subsection 55(2) would seem to be contrary to the scheme of subsection 112(3) which aims to deny losses caused by non-taxable dividends.
The CRA will consider that a dividend that has been subject to the application of subsection 55(2) is not a taxable dividend referred to in subparagraph 112(3)(b)(i).
CRA also was more loquacious on the policy considerations underlying its interpretations. For example, respecting its position that where a dividend in kind paid by a corporation is subject to s. 55(2), the dividend recipient will be considered to have acquired the distributed property at a cost under s. 52(2) equal to its fair market value, CRA stated:
It would not be logical to say that a property received as a dividend in kind that was subject to the application of subsection 55(2) because its purpose was to increase cost or to reduce gain because of the increase in cost would, in turn, not have a cost.
More generally, it stated:
The evolution of the role of subsection 55(2), as reflected in the 2015 legislative amendments to subsections 55(2), 52(3) and paragraph 53(1)(b), invites the conclusion that the application of subsection 55(2) to a dividend should not result in the denial of cost to the property that is received by the dividend recipient on the payment of the dividend.