CRA is willing to take a policy-based approach to issues re the effect of s. 55(2) on ACB
28 November 2018 - 11:32pm
What did CRA conclude in its review of questions regarding the impact of s. 55(2) on the computation of cost and CDA and the application of s. 112(3)? CRA indicated:
- Where a dividend in kind paid by a corporation is subject to s. 55(2), the dividend recipient will be considered to have acquired the distributed property at a cost under s. 52(2) equal to its fair market value.
- Since Finance’s intent is to give cost to the portion of the stock dividend that is supported by safe income, and also to a portion of the stock dividend that is technically subject to the application of s. 55(2), cost will be recognized under s. 52(3) for the amount of a stock dividend to which s. 55(2) has applied. (This and the above position reverse 9830665.)
- A dividend arising on a paid-up capital increase to which s. 55(2) applied remains a dividend for s. 53(1)(b)(i) purposes but such dividend was not permitted a deduction under s. 112(1), for purposes of the application of the basis reduction under s. 53(1)(b)(ii). Conversely, there is a reduction of cost under s. 53(1)(b)(ii) to deny cost on the amount of the dividend that exceeds safe income, and on which a deduction under s. 112(1) was obtained. Thus, cost will not be denied when a dividend on a paid up capital increase has been subject to s. 55(2).
- CRA will ensure that the taxpayer will not be penalized in the capital dividend account calculation where a stock dividend or paid-up capital increase was previously subject to s. 55(2). Thus, CRA will restrict the exclusion of 53(1)(b)(ii), and the similar provision found in s. 52(3)(a), in the CDA calculation, to situations where s. 55(2) did not apply to the stock dividend or the PUC increase.