Section 112

Subsection 112(1) - Deduction of taxable dividends received by corporation resident in Canada


Fiducie financière Satoma v. Canada, 2018 FCA 74

abusive to use s. 112(1) so as to avoid ultimate taxation of individuals

A tax plan turned upon dividends that in fact were paid to a family trust (Satoma Trust) being attributed under s. 75(2) to a corporation (“9134”) that was connected to the dividend payer, so that the dividends deemed to be paid to 9134 were eligible for the intercorporate dividend deduction. In confirming CRA’s application of GAAR to include the dividends in the hands of Satoma Trust, notwithstanding that those dividends had not yet been distributed by it, Noël CJ stated (at para. 52, TaxInterpretations translation):

Even where the application of [s. 75(2)] by itself has the desired effect, its utilization in combination with subsection 112(1) goes counter to the object and spirit of the latter provision [citing Lipson]. In this regard, the object and spirit of subsection 112(1) consists in permitting the transfer, free of tax, of dividends within certain groups of corporations, subject to their eventual taxation when the dividends are paid to their ultimate recipients. This object was thwarted, as the dividends can now be transferred to the beneficiaries without tax.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(1) - Tax Benefit tax benefit to trust from tax-free dividend even though not distributed to a beneficiary 265
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) using ss. 75(2) and 112(1) for tax-free dividends to trust thwarted s. 112(1) object to tax earnings when ultimately distributed 299
Tax Topics - Income Tax Act - Section 3 pervasive rule that the same income is not to be taxed in 2 persons’ hands 142
Tax Topics - Statutory Interpretation - Double Taxation (Presumption Against) inclusion of income in more than one taxpayer’s hands is contrary to s. 3 161
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) use of s. 75(2) to access s. 112(1) deduction for dividend in fact received by family trust, was abusive 257

Minister of National Revenue v. Trans-Canada Investment Corporation Ltd., 55 DTC 1191, [1955] CTC 275, [1956] S.C.R. 49

dividend-received deduction flowed through an investment trust

The respondent bought shares in Canadian corporations and endorsed them to a trustee who in turn issued investment certificates to the respondent, so that the respondent, along with others, held shares of "underlying companies" through an investment trust. The reference in s. 27(1)(a) of the 1948 Act to the resident Canadian corporation qualified the type of dividend, rather than the person from whom the dividend was to be received. Therefore, because the respondent was the beneficial owner of the dividends, it was entitled to the inter-corporate dividend deduction. "[T]he mere interposition of a trustee between the dividend-paying companies and the beneficial owner of the shares did not change the character of such sum."

Words and Phrases
beneficial owner

Administrative Policy

13 December 1989 T.I. (May 1990 Access Letter, ¶1228)

The deduction under s. 112(1) is applicable to dividends received by a corporation on shares included in its inventory insofar as ss.112(2.1), (2.2) and (2.4) are not applicable.

84 C.R. - Q.80

RC will scrutinize whether payments made under dividend rentals purporting to be dividends are in fact such.

Subsection 112(2.1) - No deduction permitted

See Also

Heron Bay Investments Ltd. v. The Queen, 2009 DTC 1606, 2009 DTC 1288

In obiter dicta, Hogan, J. noted (at para. 66) that the prohibition against an inter-corporate dividend deduction in s. 112(2.1) would apply where an SFI in the business of lending money to third parties subscribed for preferred shares that were, in substance, identical to unsecured debt issued by its client, but that "if the same financial institution wanted to capitalize a subsidiary through an investment in preferred shares for a reason other than for its general business purpose of money lending or investing in shares of third parties, the shares might not be acquired in the 'ordinary course of business' ...

Société d'investissement Desjardins v. MNR, 91 DTC 393 (TCC)

The taxpayer, which was a venture capital corporation, was found not to have received a deemed dividend on a term preferred share in the ordinary course of the business carried on by it. The term preferred shares, which were held by the taxpayer for only nine days before their redemption, were not acquired in accordance with the taxpayer's investment philosophy, which was to acquire medium- and long-term investments. Instead, they were acquired as part of an arrangement to maintain the taxpayer's voting interest in the corporation notwithstanding the issuance of voting shares to employees. Tremblay J. also noted that s. 112(2.1) "was clearly enacted to avoid the improper use by lending institutions of shares similar to loans the dividends on which were tax-free while the interest on such loan had to be included in the income of these corporations", whereas here no such abuse was intended by the taxpayer (p. 410).

Reed v. Nova Securities Ltd., [1985] BTC 121 (HL)

As interpreted in General Motors Acceptance Corporation (U.K.) Ltd. v. IRC, [1987] BTC 71 (C.A.).

Shares acquired by the taxpayer did not constitute trading stock (which was defined as "property such as is sold in the ordinary course of the trade") because they were worthless, and thus unsaleable. Lord Templeman stated (at p.127): "If a company is to acquire an asset as trading stock, the asset must be not only of a kind which is sold in the ordinary course of the company's trade but must also be acquired for the purposes of that trade with a view to resale at a profit. A company which acquired an asset for purposes other than trading would not, in my opinion, acquire the asset as trading stock even though the company habitually traded in similar assets."

Blok-Andersen v. MNR, 72 DTC 6309 (FCTD)

In the course of considering a submission that s. 85B(1)(B) of the pre-1972 Act (now s. 12(1)(b)) did not apply to an adventure in the nature of trade, Cattanach J. stated (at p. 6321):

"The phrase 'in the course of' contemplates a succession of events in a regular order. It also contemplates a result which follows from an event being set in motion. Such a result will arise in the case of an isolated sale as well as in a continuous number of sales."

Words and Phrases
in the course of

Administrative Policy

92 C.M.TC - Q.12

The position at 84 C.R. - Q.62 is affirmed. Whether the corporation is an SFI only by virtue of being related to a financial institution is not relevant to the determination.

19 March 1992 T.I. (Tax Window, No. 18, p. 11, ¶1819)

Generally, shares issued on the incorporation of a wholly-owned subsidiary where the proceeds are used to constitute permanent capital of the subsidiary are not acquired in the ordinary course of the parent company's business; nor are shares acquired on the sale of a business or part of the business in the course of an internal reorganization within a corporate group.

20 December 1990 Memorandum (Tax Window, Prelim. No. 3, p. 25, ¶1122)

The courts have rejected arguments to the effect that all securities acquired by certain types of corporation such as banks or life insurers have been acquired in the ordinary course of business, and in determining this question the courts have tended to use factors similar to those used in distinguishing income from capital.

86 C.R. - Q.15

(1) shares acquired from a related corporation in the course of its reorganization that are quickly redeemed generally will not be considered to have been acquired in the ordinary course; (2) the word "principal" must be given its ordinary meaning - see IT-290; where an SFI invests in term preferred shares of a related corporation, they generally will not be considered to have been acquired in the ordinary course.

ATR-10 (31 July 86)

S.112(2.1) would not apply to the issuance of term preferred shares (which are retractable and have a participating dividend) by a subsidiary to its parent which is an SFI and is engaged in a manufacturing and distribution business.

84 C.R. - Q.62

Factors considered in determining whether shares were acquired in the ordinary course, including whether the funds raised on issuance provided need capital for the subsidiary, and whether the shares were acquired as consideration on the sale of a business or part of a business where the holder's business had not previously included such transactions.

80 C.R. - Q.23

Shares issued on the incorporation of a wholly-owned subsidiary would not as a rule be issued "in the ordinary course of business".


Elizabeth J. Johnson, James R. Wilson, "Financing Foreign Affiliates: The Term Preferred Share Rules and Tower Structures", (2006), vol. 54, no. 3 Canadian Tax Journal, 726-761.

Fien, "A Directors' Liability and Indemnifications, Section 160 Assessments and Ordinary Course of Business Provisions", 1992 Conference Report , pp.53:32-53:35.

Subsection 112(2.2) - Guaranteed shares

Administrative Policy

86 C.R. - Q. 14

The conditions respecting whether the guarantor is an SFI or associated with the issuer are relevant at the time a dividend is paid and not simply at the time the shares are issued.


Webb, "Structuring International Joint Ventures: Canadian Tax Issues to Consider", Bulletin for International Fiscal Documentation , Vol. 48, No. 8/9, August/September 1994, Special IFA issue, p. 448

Discussion of "Unilever" and "Xerox" models.

Dyer, "Preferred Share Financing", 1986 Corporate Management Tax Conference, p. 20.

Discussion of background behind repeal of s. 112(2.2)(f) effective May 23, 1985.

Subsection 112(3) - Loss on share that is capital property


Toronto-Dominion Bank v. Canada, 2011 DTC 5125 [at 6061], 2011 FCA 221, [2011] 6 CTC 19

The taxpayer ("TD") held common and preferred shares in a Canadian real estate company ("Oxford"). TD received dividends from Oxford over a number of years, which it used to buy new "Class E" shares having low paid-up capital, so that Oxford could use the resulting surplus to pay off existing obligations. With the surplus thus depleted, TD sold its Oxford shares at a capital loss and used the proceeds of sale to buy shares in an Oxford affiliate.

The Court found that s. 112(3) did not apply to reduce the taxpayers' loss on the Class E shares because no dividends had been paid on them. The Minister's argument that the Class E shares were "virtually identical" to the other shares was not accepted, because the shares had substantive differences in voting rights and paid-up capital. Furthermore, even if they were virtually identical, the wording of s. 112(3) clearly applied to the sale of a Class E share only if it actually were "the share on which the dividend was received."

Administrative Policy

24 November 2013 CTF Roundtable, 2013-0508161C6 - Loss on disposition of shares

loss preservation transactions which avoid s. 112(3) stop-loss rule

A shareholder having an accrued foreign exchange loss on common shares of an FA and an accrued foreign exchange gain on a related party debt used to acquire those shares acquires a separate class of the FA's shares and pays dividends thereon with a view to such dividends not reducing a loss to be realized on the a sale of the original FA shares owned - in order that such loss can offset the FX gain on settlement of the debt. In indicating that GAAR would apply to the resulting avoidance of the stop-loss rule in s. 93(2.01) respecting the sale of the shares, CRA stated that a loss would be denied "unless the related debt is a debt described in subparagraph 93(2.01)(b)(ii), a provision which precisely specifies which gains are intended to have an effect on the computation of the amount of a loss to be denied on the disposition of FA shares," and that one such requirement was that an "arm's length foreign currency debt… was entered into within 30 days of the acquisition of the FA share."

"It would be difficult to arrive at a different conclusion" for similar transactions in as s. 112(3) context:

given that subsection 112(3) is a loss denial rule similar in nature to subsection 93(2.01) (and 93(2) as it formerly read). Furthermore, the absence of an exception from 112(3) similar in nature to subparagraph 93(2.01)(b)(ii) could be viewed as being indicative of an intention to not have any gains have an effect on the computation of the amount of the loss to be denied on the disposition of non-FA shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) loss preservation transactions which did not satisfy the s. 93(2.01) requirements 201
Tax Topics - Income Tax Act - Section 93 - Subsection 93(2.01) loss preservation transactions which did not satisfy the s. 93(2.01) requirements 201

7 October 2011 APFF Roundtable Q. 17, 2011-0412171C6 - 112(7) - Share-for-Share Exchange - 85(1)

where there is an exchange of 100 common shares in the capital of a corporation for 100 "new" common shares in its capital, there could be considered to be no disposition of the old common shares (given that the share rights are identical), so that the s. 85(1) election is unavailable. On this basis, dividends received on the "old" shares could reduce a loss otherwise deemed to arise under s. 50(1)(b)(iii) on the insolvency of the corporation, so that it would be of no import that the continuity rule in s. 112(7) does not apply to (purported) s. 85(1) exchanges.

1996 A.P.F.F. Round Table No. 7M12910 (Item 2.1)

Because most transactions contemplated in s. 85.1 (unlike those contemplated in s. 85) significantly change the taxpayer's participation in capital, the transitional provisions will not be expanded to cover s. 85.1.

Furthermore, a "disposition made in accordance with a will, accompanied by-laws or the terms and conditions of a share redeemable by mutual agreement or at the pleasure of the holder, is not considered made in accordance with an agreement in writing."


Didier Fréchette, Ryan Rabinovitch, "Current Issues Involving Foreign Exchange", 2015 CTF Annual Conference paper

Streaming of dividends on preferred shares for loss-shifting rather than 112(3) avoidance reasons (p. 26:50)

A similar issue [to the avoidance of s. 93(2.1)]...can arise in the domestic context. Assume that Canco 1 acquires all of the common shares of a second Canadian corporation, Canco 2, for $100 million. Over the years, because Canco 2 has loss carryforwards and Canco 1 is in a taxable position, a standard internal loss consolidation arrangement is put in place, in which Canco 2 makes an interest-bearing loan to its parent, Canco 1, and Canco 1 uses the funds to subscribe for preferred shares of Canco 2. The instruments (the loan and the preferred shares) have similar terms and conditions (yield, maturity, etc.). The structure stays in place for several years, resulting in significant dividends being paid by Canco 2 on its preferred shares. A few years after the loss consolidation arrangement is dismantled, Canco 1 sells the common shares of Canco 2 for $80 million, thus realizing a loss of $20 million. Subsection 112(3) does not apply to reduce the loss, because all the dividends were paid on the preferred shares, while the loss is realized on the common shares. Would the CRA seek to apply GAAR in this fact pattern?

Paragraph 112(3)(b)

Subparagraph 112(3)(b)(i)

Administrative Policy

27 November 2018 CTF Roundtable Q. 2, 2018-0780071C6 - Impact of 55(2) deeming rules

stop-loss rule does not apply to the extent of the application of s. 55(2)

After describing the stop-loss rule in s. 112(3), CRA stated:

Denying a loss on a share that is caused by a dividend that has been subject to tax under subsection 55(2) would seem to be contrary to the scheme of subsection 112(3) which aims to deny losses caused by non-taxable dividends.

The CRA will consider that a dividend that has been subject to the application of subsection 55(2) is not a taxable dividend referred to in subparagraph 112(3)(b)(i).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 52 - Subsection 52(2) property dividended has cost equal to FMV where subject to s. 55(2) 92
Tax Topics - Income Tax Act - Section 52 - Subsection 52(3) cost under s. 52(3) for stock dividend amount to which s. 55(2) applied 63
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(b) - Subparagraph 53(1)(b)(ii) no basis reduction for s. 84(1) dividend to which s. 55(2) applied 155
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (a) - Subparagraph (a)(i) 53(1)(b)(ii) and 52(3)(a) exclusion limited to where 55(2) did not apply to the stock dividend or PUC increase 68

Subsection 112(3.2) - Loss on share held by trust

Administrative Policy

16 June 2014 STEP Roundtable, 2014-0523061C6 - Trust audit issues

taxpayer stuck with two-transaction form

2009-031060117 concerned the redemption of common shares held by an estate in its first year, with the aggregate capital loss realized carried back to the final return under s. 164(6). CRA stated:

The share redemption was done in two steps so as to allow the corporation to make a subsection 83(2) election to the extent of its capital dividend account. The first redemption resulted in a deemed dividend on which the corporation made the 83(2) election, and a capital loss to the estate. The second share redemption, the following day, resulted in a deemed taxable dividend and another capital loss to the estate. It was later realized that the tax result would have been more favourable if all of the shares had been redeemed in a single transaction.

The result was that the two redemptions were viewed as separate transactions for the purpose of applying the stop-loss rule in subsection 112(3.2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(21) capital gain distributed to different beneficiary 131
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) benefit conferred when trust shares redeemed at undervalue 190
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts executors lacked power to make gift 86
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees legal and accounting expenses 39
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) settlor taking back undervalued freeze shares 70

1996 Ontario Tax Conference Round Table under "S.112 Stop-Loss Amendments, Q. 1 to 4", 1997 Canadian Tax Journal , at pp. 215-218

Discussion of anomaly in s. 112(3.2) and of grandfathering rules.


Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Trusts Resident in Canada", Chapter 3 of Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016.

No s. 112(3.2) stop loss for s. 84.1 capital dividend (p. 140)

[T]he CRA has indicated in other contexts that a dividend deemed to be paid under paragraph 84.1(1)(b) is not deemed to be paid on the shares. [fn 73: …2011-0414731E5…] Assuming that the CRAs interpretation is correct, subsections 112(3) to (7) would not apply in respect of a capital dividend that is deemed to be paid under paragraph 84.1(1)(b).

50% solution addressing s. 112(3.2) (p. 143)

[i]t many be preferable to redeem shares owned by an estate through a combination of capital dividends and taxable dividends pursuant to the so-called 50 percent solution strategy. [fn 76: See Joel Cuperfain and Robin Goodman, "Life Insurance Planning," in 2001 Prairie Provinces Tax Conference (Toronto: Canadian Tax Foundation, 2001), 12:1-40.] Under the 50 percent solution, the corporation increases the stated and paid-up capital of the class of shares held by the estate so that the estate is deemed to receive a taxable dividend on the shares equal to 50 percent of the difference between the paid-up capital of the shares and their fair market value. Following this deemed, taxable dividend, the corporation redeems the shares and elects for the deemed dividend under subsection 84(3) to be a capital dividend. Because the estate is deemed to have received taxable dividends on the shares equal to the capital dividends that were received, subsection 112(3.2) should not apply to deny any of the loss realized on the redemption of the shares. It does not appear to be possible to implement the 50 percent solution by redeeming all of the shares and electing for one-half of the subsection 84(3) deemed dividend to be a capital dividend and one-half of the deemed dividend to be a taxable dividend because subsection 84(3) deems the corporation to have paid a dividend on a separate class of shares made up of the shares that are redeemed, acquired, or cancelled, and the deemed taxable dividend is deemed to arise on a separate class of shares from the deemed capital dividend and does not reduce the impact of subsection 112(3.2) or (3.3).,,,

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(3) 374
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(4) - Paragraph 251.1(4)(d) 437
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(g) - Subparagraph 251.1(1)(g)(ii) 115
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) 141
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(1) 144
Tax Topics - Income Tax Act - Section 251.2 - Subsection 251.2(3) - Paragraph 251.2(3)(b) 112
Tax Topics - Income Tax Act - Section 252.2 - Subsection 252.2(2) 115
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(i) 176
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(d.1) 161
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 1201
Tax Topics - Treaties - Income Tax Conventions - Article 29B 239
Tax Topics - Income Tax Act - Section 248 - (2)-(41) 157
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) 199
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.2) 59
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.3) 38
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(6) 174
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) 164
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) 163
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) 91
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(18) 49
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(7.01) 66
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(19) 311
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) 125
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) 144
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(2) 379

Kevin Wark, "Corporate-Owned Insurance: Revisiting Share Redemption Arrangements", CALU Report, August 2004.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.6) 0

Joel Cuperfain, "Got Me Those 'Low Capital Gain, High Dividend Tax, Stop-Loss Rules, Estate Planning' Blues", Personal Tax Planning, 2002 Canadian Tax Journal, Vol. 49, No. 3, p. 764.

Jack Bernstein, "Don't Waste Capital Dividends", Canadian Tax Highlights, Vol. 8, No. 9, 26 September 2000, p.71.

Subsectiom 112(3.32)

Administrative Policy

29 May 2018 STEP Roundtable Q. 15, 2018-0744151C6 - 164(6) and 112(3.2)(b)

s. 112(3.2) stop-loss rule does not apply where an estate s.84(3) dividend is indirectly designated to an individual through a spousal trust

The will of the deceased created an estate under which amounts are to be paid to a spousal trust. That trust may, in turn, pay amounts to beneficiaries. The graduated rate estate ("GRE") is deemed to receive a taxable dividend on the redemption of shares. If this taxable dividend is designated to an individual, then s. 112(3.2)(b) would not apply. However, if the GRE designates the amount to the spousal trust, which then designates the amount to a beneficiary who is an individual, would s. 112(3.2)(b) apply to reduce the capital loss?

CRA indicated that the exclusion in s. 112(3.32) from the application of s. 112(3.2)(b) should apply where an estate has received an s. 84(3) deemed dividend on a redemption, it designates that dividend, distributes it to the spousal trust, and the spousal trust in turn designates and pays it to the individual beneficiary – so that the taxable dividend does not reduce the loss.

S. 112(3.32) essentially provides that the exception applies where a qualified divided received on the share by the trust, and that is designated by the trust under s. 104(19) in respect of a beneficiary that was a corporation, a partnership or a trust, where the trust establishes two different conditions. The first condition is the relevant one in this context, which is that the trust establishes that the dividend was received by a beneficiary that was an individual other than a trust.

Next it is necessary to determine whether the dividend is a qualified dividend. S. 112(6.1)(a) does not apply as the dividend is an s. 84(3) dividend. However, having regard to s. 112(6.1)(b) then where the estate has received the s. 84(3) dividend, designated it under s. 104(19) to the spousal trust, and the spousal trust has designated it to an individual beneficiary, s. 112(3.32) should apply to exclude s. 112(3.2)(b).

CRA went on to discuss the requirements for an s. 104(19) designation.

Subsection 112(4) - Loss on share that is not capital property

Administrative Policy

7 April 1993 Memorandum (Tax Window, No. 31, p. 6, ¶2513)

A standard distress preferred share ruling is that s. 112(4) will not apply in respect of any dividends received by the specified financial institution on the distress preferred shares, to any loss realized by the institution on the debt subsequent to it being reacquired by the institution or to any loss realized by the institution on any loan made by the institution as described.

91 C.R. - Q.34

Re interaction between ss.112(4) and (4.1).

19 November 1990 Memorandum (Tax Window, Prelim. No. 2, p. 18, ¶1041)

Discussion of a situation which s. 112(4)(e) was intended to cure.

Subsection 112(4.1) - Fair market value of shares held as inventory

Administrative Policy

1995 T.E.I. Round Table, Q. 18, 953112 (C.T.O. "Dividends on Shares Held as Inventory")

A taxpayer who has chosen pursuant to Regulation 1801 to value all its inventory at fair market value will recognize a gain where the deemed fair market value under s. 112(4.1) is greater than the cost of the share on which the dividends were paid.

Subsection 112(5.2)


Kevin Kelly, Sona Dhawan, "Share Repurchase Programs", Canadian Tax Highlights, Vol. 26, No. 6, June 2018, p. 9

Share repurchase programs under private agreements (SRPs) for shares eligible under a normal-course issuer bid (p. 9)

[I]n January 2018, six Canadian FIs participated in five SRPs as either an issuer or a seller. These SRPs involved Canadian FIs repurchasing their own shares from other Canadian FIs…for aggregate redemption proceeds of about $1.5 billion.

Example of generation of artificial tax loss in reliance on s. double-counting rule in s. 248(28), s. 112(5.2) stop-loss rule, s. 112(1) deduction, and low PUC and cost (pp. 9-10)

Assume that (1) the market price (and the mark-to-market cost) of the issuer’s shares is $100, (2) their PUC is $15, (3) their original cost is $40, and (4) the discount is $5 (that is, the redemption proceeds are $95). The issuer would pay $100 to buy back its shares from the public in the normal course under an NCIB. Under an SRP, the issuer buys back those shares for $95. The seller would have previously realized $60 of aggregate mark-to-market gains on the issuer shares, generally offset by a corresponding loss on any hedge….

A dividend of $80 is deemed received by the seller (subsection 84(3)) and an intercorporate dividend deduction of $80 is generally available (subsection 112(1)). Proceeds of disposition are reduced by the amount of the deemed dividend—from $95 to $15—consistent with subsection 248(28) and a 1998 CRA technical interpretation [980394]…. The dividend stop-loss rule in subsection 112(5.2) requires the increase of the proceeds of $15 by the lesser of the loss otherwise determined (using the original cost, not the mark-to-market cost) and the amount of any dividends deducted under section 112. The loss otherwise determined is $25 ($15 proceeds less $40 original cost). The deductible dividends are $80. The lesser amount ($25) is added to the proceeds otherwise determined ($15); adjusted proceeds are $40. Because the mark-to-market cost is $100, the seller’s tax loss realized from the SRP is $60, equal to the mark-to-market gain previously included in income, but that gain was generally offset by a corresponding hedge loss. The amount of this tax loss is deducted twice….

S. 112(5.2) announcement (resulting in cancellation of outstanding SRPs) (p. 10)

The proposed amendment to subsection 112(5.2) denies this additional tax loss because it requires the proceeds’ increase by the deemed dividend amount. In the example, the adjusted proceeds would be $95…

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28) reliance on exclusion of deemed dividend from proceeds of mark-to-market shares to generate artificial loss 173

Subsection 112(8)

Subsection 112(9)

Administrative Policy

Edward Miller and Matias Milet, "Derivative Forward Agreements and Synthetic Disposition Arrangements", 2013 Conference Report, (Canadian Tax Foundation), pp.10:1-50

Example of interaction between ss. 112(9) and (8) (p.10:42)

[S]ubsection 112(9) expressly provides that the 365 day period is determined without reference to subsection 112(9) itself, and subsection 112(8) expressly provides that its results apply for purposes of subsection 112(9). The resulting interaction of the two provisions can be illustrated by the following example. A corporate taxpayer acquires a share of a taxable Canadian corporation Canco on January 1, 2014; enters into a 35 day SDA with respect to the share on January 5, 2015; continues to own the share after the termination of that SDA; enters into another 35-day SDA with respect to the share on November 1, 2015; and finally disposes of the share at a loss at the conclusion of the second SDA on December 5, 2015. But for the 365-day exception, the taxpayer would be deemed by subsection 112(8) not to own the Canco share for dividend stop-loss purposes during the term of the first SDA (the 365 days beginning on January 5, 2015). However, since the taxpayer has owned the share for at least 365 days prior to the first SDA, the exception in subsection 112(9) applies (without any immediate consequence since the first SDA is not followed by a loss realization event). However, the exception will not apply to the second SDA, despite the fact that by the time the second SDA is entered into, on November 1, 2015, the taxpayer has held the Canco share for well over 600 days. The exception will not apply to the second SDA because in determining whether a taxpayer has owned a property for a 365-day period prior to the commencement of an SDA, that holding period is measured without reference to subsection 112(9). The result is that the first SDA must be taken into account in determining whether prior to the second SDA's inception the taxpayer owned the Canco shares for 365 days.


Raj Juneja, "Taxation of equity derivatives", 2015 CTF Annual Conference paper

Deemed non-ownership under SDA for stop-loss purposes (p. 17:14)

An additional rule in subsections 112(8) and (9) also applies where the derivative is a "synthetic disposition arrangement" (as defined in subsection 248(1)). As noted below, the typical types of equity derivatives discussed herein are synthetic disposition arrangements. In such cases, where the derivative is for 30 days or more, the taxpayer is deemed not to own the shares for the purpose of the stop-loss rules for the duration of the derivative unless the taxpayer held the shares for the 365-day period that preceded the date of the derivative.

Subsection 112(10)


Raj Juneja, "Taxation of equity derivatives", 2015 CTF Annual Conference paper

Ordering rule limiting access to 365-day stop-loss exception (p.17:14)

[A] specific ordering rule will be included in subsection 112(10), which provides that if a synthetic equity arrangement is in respect of fewer shares than owned by the taxpayer, that arrangement is deemed to be in respect of the shares in the order in which the taxpayer acquired them for the purpose of the stop-loss rules. This ordering rule prevents a taxpayer from matching synthetic equity arrangements to more recently acquired shares, while allowing previously acquired shares to meet the 365-day ownership requirement and benefit from the exclusion from the stop-loss rules on a subsequent disposition.