CRA considers that an Opco dividend to Holdco whose sole purpose is creditor-proofing is subject to s. 55(2)

CRA was asked whether the draft s. 55(2) rules would apply, where in order to “shelter” the assets of a construction company, the company dividends its retained earnings to its holding company shareholder with the money being lent back to it. This was different from a similar question posed two times previously (2015 APFF RT, Q. 12 and 2015 CTF RT, Q. 6(e)), as there was a more emphatic assumption that the sole purpose of the dividend was creditor-proofing.

No matter. After questioning, then accepting for discussion purposes, a dubious assumption that the shares in the oeprating company had no safe income on hand, CRA indicated that the amount of the dividend would be deemed to be a capital gain, as it considered that the purpose of the transactions was “to secure those [construction business] assets by diminishing the total value of the operating corporation and augmenting the value of its shareholder (the holding company).”

Neal Armstrong. Summary of 21 December 2015 T.I. 2015-0617731E5 F under s. 55(2.1)(b).