Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether in the context of a deemed dividend arising under subsection 84(3), the provisions of paragraph 55(2)(b) and subparagraph (j)(i) of the "proceeds of disposition" definition in section 54 could be applied to result in two capital gains.
Position: No.
Reasons: There is only one possible capital gain/loss from the disposition of a share to which paragraph 55(2)(b) applies.
2024 CTF Annual Tax Conference
CRA Round Table
Question 8: Application of Paragraph 55(2)(b)
Could the CRA please comment on the following example:
- Canco A is a taxable Canadian corporation which owns shares of another taxable Canadian corporation, Canco B.
- The shares of Canco B owned by Canco A have an ACB and PUC of $100.
- Canco B redeems/purchases its shares held by Canco A for $1,000.
- Pursuant to subsection 84(3), Canco B is deemed to have paid and Canco A is deemed to have received a taxable dividend of $900.
- Subsection 55(2) applies such that, for purposes of the Act, the deemed dividend is considered not to be a dividend and to be proceeds of disposition of the share.
From a policy and logic perspective, the appropriate result in this situation appears to be that Canco A should realize a capital gain of $900. However, there is some circularity in the drafting of subparagraph (j)(i) of the definition of "proceeds of disposition" in section 54 and paragraph 55(2)(b). In particular:
- subparagraph (j)(i) of the definition of "proceeds of disposition" reduces the proceeds of disposition otherwise received ($1000) by the amount of any dividend deemed under subsection 84(3) "except to the extent the dividend is deemed by paragraph 55(2)(b) to be proceeds of disposition of the share"
- paragraph 55(2)(b) deems the dividend to be proceeds of disposition of the share that is redeemed "except to the extent that the dividend is otherwise included in those proceeds."
Members of the tax community have expressed concern that the provisions could be applied to result in the same $900 resulting in two capital gains – one on the disposition without subparagraph (j)(i) of the definition of proceeds of disposition applying, and a second one under paragraph 55(2)(b).
In this scenario, can the CRA confirm there is only one capital gain of $900?
CRA Response
The CRA is of the view that there is only one possible capital gain/loss from the disposition of a share to which paragraph 55(2)(b) applies. In addition, we confirm that, in the example described above, the capital gain on the disposition of the Canco B shares by Canco A is $900.
Allison Thomas
December 3, 2024
2024-103820
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