CRA indicates that on an excepted gift of 10% of the shares of a CCPC to a public foundation and the shares’ redemption, s. 129(1.2) could deny the CCPC’s dividend refund
An individual makes a donation (being an excepted gift described in s. 118.1(19) ) of 10% of his shares (being preferred shares with a nominal PUC and ACB) of a corporation with a NERDTOH balance to an arm’s length registered charity and public foundation. The donated shares are then promptly redeemed, thereby generating a deemed dividend (with no s. 89(14) designation being made.) This generates a dividend refund to the corporation.
CRA was asked whether s. 129(1.2) could be applied to deny the dividend refund notwithstanding that the corporation had liquid assets that would have been more than sufficient to have paid a taxable dividend to the individual so as to generate the dividend refund. CRA responded that s. 129(1.2) could apply in that the series of transactions could satisfy the purpose test in s. 129(1.2). It added:
[T]he CRA took a similar approach in … 2016-0628181R3 by adding an opinion that any dividend … paid … on the shares of … the private corporation (Holdco) to the foundation (Foundation), which had previously acquired the shares as a result of the transfer of the shares by the testamentary spousal trust for the spouse of the deceased following the death of the spouse, would be considered not to be a taxable dividend, with the result that subsection 129(1. 2) would apply … .
Neal Armstrong. Summary of 7 October 2020 APFF Roundtable Q. 3, 2020-0851991C6 F under s. 129(1.2).