Joint Committee Submission provides illustrations of the potential lack of integration under the new s. 55(2) rules and potential circularity issues arising on late capital dividend elections

The Part IV tax exception from the application of s. 55(2) has been narrowed so that it does not apply where there has been a refund of the Part IV tax as a consequence of a dividend payment by the corporation , even where this occurs on the payment of a taxable dividend to an individual shareholder.

A Joint Committee Submission attaches examples which the Committee had informally provided to Finance earlier in 2016. They illustrated concerns that this change to the Part IV exception distorted the integration system, producing results that could be either more or less favourable than intended. The more favourable results depend in part on having the ultimate individual shareholder accessing the capital dividend account generated from the application of s. 55(2) under the new rules.

The submission also illustrates the uncertainty regarding potential circularity arising in connection with late capital dividend elections: after the generation of a full dividend refund on a dividend paid to an individual so that the paying Holdco becomes subject to a s. 55(2) capital gain, a late s. 83(2) election is made to convert part of the dividend into a capital dividend based on s. 55(2) having generated a capital gain – but this reduces the amount of the s. 55(2) gain.

Neal Armstrong. Summary of Bruce Ball, Ken Griffin, Rick McLean, Eric Xiao, “Subsection 55(2) material and Part IV,” Submission of the Joint Committee, 13 October 2016 under s. 55(2).