The expansion under s. 55(2.1)(b) of the scope of s. 55(2) has resulted in potential anomalies

Prior to the introduction of the new s. 55(2.1)(b), a Holdco could create a Subco with common shares having a fair market value equal to their adjusted cost base (by having Opco pay a stock dividend of pref shares with full paid-up capital and transferring those prefs to Subco for high basis shares of Subco) – and then have Subco declare a dividend to it of the Opco prefs, which reduces the FMV of Subco’s shares below their ACB but was not caught by the old s. 55(2) because the purpose of the dividend could not be to reduce a capital gain on the Subco shares. This increased basis in Holdco’s investment could reduce the capital gain realized by it on a subsequent arm’s length sale. New S. 55(2.1)(b)(ii)(B) would likely catch this basis creation as its purpose likely was to increase the total cost amount of Holdco’s property.

A somewhat odd result of the new s. 55(2.1)(b) is that where the FMV of the shares of Opco have temporarily declined below their ACB, the safe-income exception will not apply to a cash dividend paid by Opco, so that it is necessary to address the FMV-reduction purpose test in s. 55(2.1)(b)(ii)(A).

The legislative definition of "sate-income determination time" (which references the beginning of a series of transactions) was designed for a share sale transaction. and has not been amended to align better with the new rules. For example, if a corporation establishes a policy to distribute each year's earnings, it would be unreasonable if the dividend paid to distribute the first year's earnings triggered a safe-income determination time, thereby preventing the subsequent years' earnings from being added to safe income.

Neal Armstrong. Summaries of Rick McLean, "Subsection 55(2): What Is the New Reality?" 2015 CTF Annual Conference paper under s. 55(2.1)(b), s. 55(1) – safe income determination time, s. 55(2.3).