CRA confirms that the basic application of s. 55(2) to s. 84(3) deemed dividends is not altered by the draft amendments

CRA has confirmed that the July 31, 2015 proposed amendments to the s. 55(2) rules will not change some basic propositions:

• A s. 84(3) deemed dividend not exceeding the safe income on hand will be exempted from capital gains treatment.
• Conversely, the amount of a s. 84(3) deemed dividend exceeding the safe income on hand “that is taxable to the party designated by the corporation pursuant to subparagraph 55(5)(f)(i) is deemed to be a separate taxable dividend,” so that s. 55(2) will apply to that separate dividend subject to the Part IV tax and s. 55(3)(a) exceptions. (CRA did not discuss its position under the current legislation that s. 55(5)(f) designations may not be necessary – see 2014-0522991C6).

CRA also noted that under the draft legislation, the application of s. 55(2) to a redemption/repurchase of a share, will result in an addition under draft s. 55(2)(b to the share’s proceeds of disposition – whereas if s. 55(2)(b) does not apply, there will be a deemed capital gain under draft s. 55(2)(c) – without commenting on the wording of draft s. 55(2)(b) now referring to share redemptions/purchases rather than to any share dispositions.

Neal Armstrong. Summaries of 9 March 2016 T.I. 2016-0630281E5 F under s. 55(2.1)(c), s. 55(5)(f) and s. 55(2)(b).