CRA finds that recurring ordinary dividends can constitute a transfer of property sufficient to engage s. 125(5.2)

The business limit reduction under s. 125(5.1)(b) takes into account the passive income (a.k.a. “adjusted aggregate investment income”) of associated corporations. S. 125(5.2) deems two related corporations to also be associated where one of them directly or indirectly transfers assets to the other and one of the reasons for the transfer can reasonably be considered to be to reduce the passive income of the associated group for s.125(5.1)(b) purposes.

Opco, which is owned by five Holdcos, each of which are related to one another but are not associated, will continue its established pattern of annually distributing substantially all of its income as dividends, with the result that the Holdcos’ now-substantial accumulated investment funds will continue growing. Would s. 125(5.2) apply? CRA stated:

Whether subsection 125(5.2) would apply… remains a question of fact … . However, if it may reasonably be considered that one of the reasons that the payment of dividends was made was to reduce the adjusted aggregate investment income … in respect of Opco … then … the anti-avoidance rule in subsection 125(5.2) could apply.

Neal Armstrong. Summary of 7 June 2019 STEP Roundtable Q. 16, 2019-0798461C6 under s. 125(5.2).