The 2018 Budget s. 112(5.2) amendment resulted in cancellation of the outstanding SRP programs

An investment dealer holds a share of an issuer with a paid-up capital of $15, an original cost to it of $40 and a fair market value of $100. It previously realized $60 of aggregate mark-to-market gains on the share, offset by a $60 loss on a hedge. Under a private agreement with the issuer, it sells its share to the issuer for $95.

In reliance on 980394, its proceeds of disposition exclude its deemed dividend of $80. Old s. 112(5.2) only required these proceeds to be increased to its original cost of $40. Hence, it realized a loss of $60 for ITA purposes. The new s. 112(5.2) instead increases its proceeds by the full deemed dividend amount of $80; hence, no loss.

In January 2018, six financial institutions purchased $1.5B of their own shares held by other financial institutions pursuant to “share repurchase programs” ( “SRPs”) that permitted such private sales to occur for securities law purposes where a normal course issuer bid was in play. Following the February Budget announcement of the new s. 112(5.2) rule, the issuers of the outstanding SRPs issued press releases announcing their cancellation.

Neal Armstrong. Summary of Kevin Kelly and Sona Dhawan, “Share Repurchase Programs,” Canadian Tax Highlights, Vol. 26, No. 6, June 2018, p. 9 under s. 112(5.2).