CRA lets the chips fall where they may in interpreting the new s. 55(2) rules

Holdco holds shares of Opco with a nominal ACB and no safe income. In order to creditor-proof Opco, Holdco lends money to Opco equal to the accrued gain on the shares and receives that money back as an actual dividend (targeted to be tax-free). It does not matter if this transaction has no capital gains avoidance purpose. CRA accepted that since the purpose of the creditor-proofing is to reduce the fair market value of the Opco shares, the full amount of the dividend is deemed to be a capital gain.

Suppose that in the same transaction, the dividend from Opco was subject to Part IV tax, but this tax was refunded as a result of payment of an equivalent dividend to the individual shareholder of Opco. Under the new rules, it does not matter that the individual is not a corporation eligible for the s. 112(1) deduction, so that the dividend amount will still be deemed to be a capital gain.

Under a variation of the first alternative where the shares of Opco have full ACB, the dividend amount also will be a capital gain in CRA’s view, so that the ACB can only be utilized on a future disposition of the Opco shares.

Neal Armstrong. Q. 12 of 9 October APFF Roundtable under 2015 APFF Conference.