CRA indicates that a dividend paid out of disability proceeds to fund purchase by survivor’s holdco might not have s. 55(2.1)(b) purpose

Opco is held equally by two unrelated individuals directly and through their respective Holdcos and, on the disability of one, Opco receives disability insurance proceeds and pays them as a special dividend to the healthy shareholder’s Holdco to fund the purchase by it of the other’s Holdco. CRA stated that there were insufficient facts to say much. However, it noted that in the circumstances described in 2015-0613821C6 it could give rulings on the application of the s. 55(2.1)(b) purpose test, and then stated:

Although in certain circumstances the dividend paid by Opco to the holding corporation of the active shareholder may not be considered to have any of the purposes described in paragraph 55(2.1)(b), that determination can only be made after a review of all the facts of a particular situation.

In commenting on the same scenario, Finance made very general comments, such as “The purpose of the payment or receipt of a dividend is determined according to the facts relating to the series of transactions or events of which the payment and receipt of the dividend is a part.”

Neal Armstrong. Summary of 5 October 2018 Financial Strategies and Instruments Roundtable, Q.5 under s. 55(2.1)(b) and of Finance response to Q.5 under s. 55(2.1)(b).