CRA reconfirms that the s. 69 rule does not apply to the amount of deemed dividends

CRA has confirmed an earlier position (see 2004 APFF Roundtable Q.15 No. 2004-008682 and 31 December 2004 Memorandum 2004-0091781I7) that where shares of a corporation are purchased for cancellation in a non-arm's length transaction for a purchase price that is less than their fair market value, s. 69 will not apply to increase the deemed dividend to the shareholder (in this case, a Canadian-controlled private corporation).  S. 69 instead will apply to increase the capital gain, if any, arising on the purchase for cancellation transaction by the excess of that fair market value over the purchase price.

In this case, the effect of this position appears to be that the shareholder could not utilize additional safe income on hand that would have been available to shelter a larger deemed dividend.

Neal Armstrong.  Summary of 3 July 2012 Memorandum 2012-0450821I7 F under s. 84(3).