CRA’s position that s. 84.1 dividends can be capital dividends and generate dividend refunds raises tax-deferral possibilities

11 October 2019 APFF Roundtable, Q.1 and 3 December 2019 CTF Roundtable, Q.4 confirmed that a s. 84.1 deemed dividend can benefit from both the s. 129(l)(a) dividend refund and the capital dividend account (CDA) mechanism. This might facilitate share sale planning.

For example, Bob would realize a capital gain of $999,999 and around $240,000 of capital gains tax if he sold all the shares of Opco to a third-party purchaser for $1 million.

He could instead transfer ½ of his Opco shares on a rollover basis to newly-formed Holdco, with Holdco then realizing a $500,000 capital gain on those shares on an internal transfer, so that Holdco is subject to $127,000 of corporate tax, has a $250,000 addition to its CDA and generates $77,000 of non-eligible RDTOH. He then transfers his remaining Opco shares to Holdco in two tranches for two $250,000 notes, resulting in the receipt of a $250,000 capital dividend and in a second $250,000 (taxable) dividend that generates a full refund of the $77,000 of NERDTOH to Opco.

The result (leaving aside ss. 245(2) and 129(1.2)) is that Bob pays $102,500 in personal tax and Holdco bears net corporate tax of $50,000. The total of $152,500 is less than $240,000, because tax is deferred until further dividends are paid by Holdco.

Neal Armstrong. Summary of Aasim Hirji and Kenneth Keung, “Planning Possibilities Resulting from CRA Policy Reversal on Section 84.1,” Tax for the Owner-Manager, Vol. 20, No. 1, January 2020, p.9 under s. 129(1).