CRA confirms its recent volte-face that s. 84.1(1)(b) dividends can generate dividend refunds

In 2002-0128955, CRA indicated that a deemed dividend under s. 84.1(1)(b) would not generate a dividend refund (DR). In Q.1 of the 2019 APFF Roundtable, CRA stated:

[W]e have come to the conclusion that the position described in the Interpretation no longer represents the position of the CRA. In particular, according a DR to a corporation deemed to have paid a dividend by virtue of paragraph 84.1(1)(b) provides in our view a result that is more compatible with the integration principle enshrined in the Income Tax Act.

CRA essentially repeated this position at the 2019 CTF Roundtable, but expanded somewhat on its “integration” comment. It noted that the deemed dividend treatment under s. 84.1 allows the individual taxpayer on the receipt side to benefit from the integration mechanisms that are provided in the Act such as the gross-up and the dividend tax credit.

CRA also takes the position that, if the individual taxpayer is already a shareholder of the corporation, the individual can also benefit from another integration mechanism: the CDA account with respect to deemed dividend under s. 84.1. Accordingly, it is hard to justify why an individual taxpayer could benefit from the various integration mechanisms while the purchaser corporation could not.

Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.4 under s. 129(1).