18 September 2025 CLHIA Roundtable Q. 4, 2025-1067971C6 - Donation of shares and dividend refund

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 CRA can confirm that subsection 129(1.2) does not apply in the context of a donation of shares by an estate to a charity.

Position: No. Depends on the facts.

Reasons: According to the law and previous CRA positions.

CLHIA Roundtable – September 2025

Question 4 – Donation of shares and dividend refund

Background

It is possible for the shareholder of a private corporation to donate shares in their private corporation via their will to a registered charity. Subsequently, those shares can be redeemed by the private corporation, resulting in a deemed dividend to the registered charity (subsection 84(3) of the Act (endnote 1) ). In turn, the payment of the dividend can trigger a dividend refund to the private corporation under subsection 129(1). However, there is some uncertainty as to whether the CRA will apply subsection 129(1.2) to deny a dividend refund to the corporation in these circumstances.

This uncertainty is best summarized in Justice Bell’s comments in Canwest Capital Inc. v. R. [97 D.T.C. 1, (T.C.C.)] at paragraph 21:

“A provision in a self-assessing taxation system should be clear and capable of ready comprehension. Subsection 129(1.2) falls short of this standard. Subsection 129(1) entitles a taxpayer to a dividend refund on the payment of taxable dividends. Subsection 129(1.2) disentitles a taxpayer to such refund without any description of circumstances justifying that result. The Court should be able to interpret legislation and to apply it to the facts without the task of having to divine meaning from an assemblage of words whose intended objective could hardly be better disguised. In such circumstances the Court must reluctantly resort to other materials in an effort to glimpse the creature concealed.”

Hypothetical example

Consider the following hypothetical situation:

1. An individual resident in Canada (“Shareholder A”) is the sole shareholder of a Canadian-controlled private corporation (“Opco”) that carries on an active business.

2. Shareholder A owns common shares (the “Common Shares”) and preferred shares (the “Preferred Shares”) of Opco. The Preferred Shares have a redemption value of $1 million and an adjusted cost base and paid-up capital of nil.

3. The terms of Shareholder A’s will provide that the Preferred Shares are to be gifted to a registered charity that is not a private foundation (the “Charity”) on the death of Shareholder A. The Charity and Shareholder A deal at arm’s length with each other.

4. Shareholder A dies. At the time of Shareholder A’s death, Opco has a FMV of $5 million and non-eligible refundable dividend tax on hand of $250,000.

5. The estate of Shareholder A (the “Estate”) gifts the Preferred Shares to the Charity. Such gift qualifies as an excepted gift as all of the conditions of subsection 118.1(19) are met. At the time of the gift, the Estate holds the Common Shares.

6. Opco redeems the Preferred Shares for $1 million, resulting in a deemed taxable dividend (the “Dividend”) of $1 million to the Charity pursuant to the application of subsection 84(3).

7. Opco claims a dividend refund of $250,000 as a result of the Dividend.

Question

Can the CRA confirm that subsection 129(1.2) does not apply to the Dividend considering that:

• one of the main purposes for the donation of the Preferred Shares was to provide a cash gift to the Charity on their redemption; and
• Opco had sufficient assets that would have otherwise permitted it to pay taxable dividends to the Estate and obtain a dividend refund even if the series of transactions was not carried out?

CRA Response

For the reasons that follow, we are not able to confirm that subsection 129(1.2) does not apply to the Dividend.

Subsection 129(1.2) generally provides that where a dividend is paid on a share of the capital stock of a corporation, and the share was acquired by its holder in a transaction or as part of a series of transactions or events, one of the main purposes of which was to enable the corporation to obtain a dividend refund (referred to herein as the “purpose test”), the dividend shall, for the purpose of subsection 129(1), be deemed not to be a taxable dividend. Consequently, if subsection 129(1.2) applies, the corporation that paid (or was deemed to have paid) the dividend will not be able to obtain a dividend refund in respect of the dividend.

The CRA is particularly concerned with arrangements, such as the current situation, where a corporation obtains a dividend refund without the related shareholder tax being paid. We note that this concern was expressed in the Technical Notes accompanying the introduction of subsection 129(1.2).

With respect to the current situation, the stated facts that:

• the terms of Shareholder A’s will expressly provide that the Preferred Shares are to be gifted to the Charity, without any apparent discretion afforded to the executor of the Estate; and
• Opco had sufficient assets to pay a taxable dividend and obtain a dividend refund even if the series of transactions was not carried out,

are not sufficient, in and by themselves, to conclude on whether or not the purpose test was satisfied in the circumstances. Instead, the application of the purpose test must be determined in light of all relevant facts. In particular, the determination of purpose is based on facts that are particular to a situation, including, but not limited to, the actions taken by the parties and their motivation. In Ludco Enterprises Ltd. v. Canada, 2001 SCC 62, the Court was of the view that, in the interpretation of the Act, as in other area of law, where purpose or intention behind actions is to be ascertained, courts should objectively determine the nature of purpose, guided by both subjective and objective manifestation of purpose.

It is also not clear to us that the fact that one of the main purposes of the donation of the Preferred Shares was to provide a cash gift to the Charity, as stated in the question, would be of assistance in showing that the purpose test is not satisfied. Specifically, if the intention was to provide a cash gift to the Charity, then it is unclear why the donation of the Preferred Shares to the Charity was necessary.

Finally, please note that the CRA is open to consider rulings that involve the determination of purpose where taxpayers require some level of comfort regarding the non-application of subsection 129(1.2) to their proposed transactions. A favourable ruling could be provided where all manifestations of purpose and corroborating circumstances are provided to support the non-application of subsection 129(1.2). The ruling would be conditional on the representation made by the taxpayer in relation to the purposes for which the share was acquired and on the completeness of the description of all the manifestations of purpose and corroborating circumstances.

Matthew K.X. Weaver
2025-106797
September 18, 2025

ENDNOTES

1 Unless otherwise stated, all references to a statute are to the relevant provision of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the “Regulations”).