Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principales Questions: 1. Whether subsection 55(2) (as provided for in the Legislative Proposal of July 31, 2015) will apply with respect to the redemption of shares when the amount of the deemed dividend does not exceed the income earned or realized as described in new paragraph 55(2.1)(c).
2. When shares are redeemed and there is a deemed dividend pursuant to subsection 84(3), whether the amount equal to the income earned or realized as described in new paragraph 55(2.1)(c) can be considered as a separate taxable dividend pursuant to paragraph 55(5)(f).
3. When shares are redeemed and there is a deemed dividend pursuant to subsection 84(3), whether a separate taxable dividend that exceeds the amount described in new paragraph 55(2.1)(c) would result in a capital gain.
Position Adoptée: 1. No.
2. Yes, if the corporation designates that amount in its return of income under Part I for the taxation year during which the dividend was deemed to be received.
3. Paragraph 55(2)(b) would deem that amount to be included in the proceeds of disposition of the shares redeemed.
Raisons: 1. Wording of the Legislative Proposals.
2. Wording of the Act.
3. Wording of the Legislative Proposals.
XXXXXXXXXX
2016-063028
Sylvie Labarre, CPA, CA
March 9, 2016
Dear Sir,
Subject: Legislative Changes Respecting Subsection 55(2)
This is in response to the email that you sent on XXXXXXXXXX to the Honourable Diane Lebouthillier, Minister of National Revenue, to which you attached a letter regarding the subject mentioned above.
Unless otherwise stated, all statutory references herein are references to the provisions of the Income Tax Act (hereinafter the "Act").
Questions
Your questions concern the amendments to section 55 set forth in the July 31, 2015 legislative proposals concerning the Act and the Regulations (hereinafter, the “Legislative Proposals ").
Your questions are as follows:
1. Were subsections 55(2) and 55(2.1) as set out in section 13 of the Legislative Proposals intended to exempt, from capital gains treatment, a dividend resulting under subsection 84(3) from a redemption of shares whose amount does not exceed the safe income as stipulated in paragraphs 55(5)(b) to 55(5)(d) and which would be deductible under subsection 112(1) or 112(2) by a Canadian recipient corporation?
2. Where the amount of a dividend resulting from a redemption of shares under subsection 84(3) exceeds the safe income stipulated in paragraphs 55(5)(b) to 55(5)(d), will it be treated as a separate taxable dividend of the recipient corporation under paragraph 55(5)(f)?
3. Does the designation by the corporate recipient of part of a dividend as a separate taxable dividend in respect of the portion of the dividend exceeding the safe income under paragraphs 55(5)(b) to 55(5)(d) result in a capital gain corresponding to such separate taxable dividend in light of sections 12 and 13 of the Legislative Proposals that contain inter alia an amendment to paragraph (j) of the definition of "proceeds of disposition" in section 54?
Our Comments
This technical interpretation provides general comments on certain of the Legislative Proposals and on the Act, as the case may be. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.
We understand that the redeemed shares referred to in your questions are capital property.
First question
As stated in the explanatory notes to the Legislative Proposals, the rules in subsection 55(2) are "directed against dividends designed to use the intercorporate dividend deduction to unduly reduce the capital gain on any share." This remains one of the objects of new subsections 55(2) and 55(2.1).
The conditions for the application of subsection 55(2) are found in subsection 55(2.1), which is contained in section 13 of the Legislative Proposals. One of these conditions is that the amount of the dividend exceeds the amount of the income earned or realized by any corporation — after 1971 and before the safe-income determination time for the transaction, event or series — that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at fair market value, immediately before the dividend, of the share on which the dividend is received ("safe income on hand").
Therefore, if this condition is not satisfied, subsection 55(2) will not apply. We would consider that a deemed dividend arising on the redemption of shares that is equal to or lower than the safe income on hand respecting the redeemed shares does not have a purpose of effecting a significant reduction of the capital gain. In this regard, paragraphs 55(5)(b) to (d) are the rules for calculating the income earned or realized by a corporation.
Furthermore, the rules in subsection 55(2) do not apply to the portion of the dividend subject to tax under Part IV that is not refunded as a consequence of the payment of a dividend by a corporation where the payment is part of the series referred to in subsection 55(2.1). Moreover, in a given situation, it is necessary to consider whether the exceptions to the application of subsection 55(2), set out in paragraphs 55(3)(a) and (b) apply when there is a share redemption.
Second question
As provided in paragraph 55(5)(f) and unless subsection 55(2.3) contained in Section 13 of Legislative Proposals applies in a given situation, a corporation may designate in its return of income under Part I for the taxation year in which the dividend was received, any portion of the taxable dividend to be a separate taxable dividend. This designation can be made in respect of a dividend deemed to be received under subsection 84(3). Moreover, as your question does not apply to a stock dividend, subsection 55(2.3) contained in section 13 of Legislative Proposals will not apply.
The amount of the excess dividend that is taxable to the party designated by the corporation pursuant to subparagraph 55(5)(f)(i) is deemed to be a separate taxable dividend.
Third question
If subsection 55(2), as set out in section 13 of the Legislative Proposals, applies in a given situation and if the separate taxable dividend to which subsection 55(2) applies arises from the application of subsection 84(3) to the redemption of a share by the corporation that issued the share, the separate taxable dividend will be deemed to not be a dividend received by the recipient of the dividend and will be deemed, under paragraph 55(2)(b), to be included in the proceeds of the disposition of the redeemed share, except to the extent that the dividend is otherwise included in calculating those proceeds. The new definition of "proceeds of disposition" in section 54, contained in section 12 of the Legislative Proposals, provides that the dividend deemed to be received under subsection 84(3) will be reduced by the "proceeds of disposition" of the share except to the extent that the dividend is deemed by paragraph 55(2)(b) to be the proceeds of disposition of a share. This inclusion in the proceeds could result, in some circumstances, in an additional capital gain.
If subsection 55(2) applies, but paragraph 55(2)(b) does not apply, in a given situation, the dividend will be deemed, under paragraph 55(2)(c) to be a capital gain of the recipient of the dividend, for the year in which the dividend was received, from the disposition of a capital property. In such a case, it is not necessary to refer to the "proceeds of disposition" as defined in section 54 in respect of the separate taxable dividend.
We hope that our comments will be helpful.
Stéphane Charette, CPA, CMA, MBA
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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© Sa Majesté la Reine du Chef du Canada, 2016
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2016
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2016