CRA is negative on using a stock dividend of nominal value discretionary shares to shift value to an affiliated company

An individual) holding Class A common shares of Opco with substantial safe income on hand (“SIOH”) and an undisclosed ACB, receives a stock dividend of Class B discretionary voting shares, which are voting, participating, bear discretionary dividends and are redeemable by Opco for $1 – and then transfers the Class B share to a new Holdco under s. 85(1). Opco then pays a $1M dividend to Holdco.

CRA noted that no safe income travelled with the Class B share’s transfer to Holdco and stated that “if all other conditions were satisfied, subsection 55(2) would apply in respect of the dividend of $1 million.”

Neal Armstrong. Summary of 7 October 2016 APFF Roundtable, Q. 15 under s. 55(2.1)(c).