Re s. 129(1.2), CRA states that it “is particularly concerned with arrangements … where a corporation obtains a dividend refund without the related shareholder tax being paid”

As directed by the terms of the will of an individual (Shareholder A) holding the high-low preferred shares of Opco (having a redemption value of $1 million) and its common shares, the preferred shares were gifted on the individual’s death to an arm’s-length registered charity as an excepted gift (as per s. 118.1(19).) At that time Opco had an FMV of $5 million and a NERDTOH balance of $250,000. The redemption of the preferred shares in the hands of the charity resulted in a deemed dividend of $1 million and a dividend refund claim by Opco of $250,000.

Would s. 129(1.2) apply to deny the dividend refund?

After noting that it “is particularly concerned with arrangements, such as the current situation, where a corporation obtains a dividend refund without the related shareholder tax being paid,” CRA stated:

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. … [T]he 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.

Neal Armstrong. Summary of 18 September 2025 Roundtable, 2025-1067971C6 - CLHIA 2025 – Q.4 under s. 129(1.2).