CRA considers the possibility that a portion of redemption proceeds could be treated as a dividend under Barbados corporate law

The s. 90(2) rule, which deems a pro rata distribution received on a foreign affiliate share to be a dividend, does not apply to a “distribution made…on a redemption …of the share.”

Canco held the preferred, but not the common, shares of a Barbados International Business Company (“FA”), and its preferred shares were redeemed. Although the relevant facts are mostly redacted, it would appear that the resolution pursuant to which FA redeemed the shares provided that a portion of the proceeds paid on the redemption was a dividend, and Canco apparently relied on this wording rather than making a s. 93(1) election. The Directorate stated:

If there is only, as a matter of law, a redemption and cancellation of shares, or if there is no conclusive evidence as to whether there is, in part, a dividend, we would generally view all such amounts as having been received as proceeds from the disposition of the… Shares, and no amount as having been received as a dividend.

This seems to imply that the Directorate was amenable to the possibility that, with the right corporate-law treatment, the proceeds could in part be a dividend even though they were all paid “on a redemption …of the share[s].”

The Directorate also stated:

If there is, in part, a dividend… to the extent the purpose of issuing the...Shares is to skew exempt surplus to the Canadian shareholder…consideration [should] be given as to the potential application of subsection 95(6) and/or subsection 245(2).

Neal Armstrong. Summary of 11 April 2017 Internal T.I. 2016-0670541I7 under s. 90(2).