Section 52

Subsection 52(1) - Cost of certain property the value of which included in income

Administrative Policy

11 March 2014 Internal T.I. 2013-0513221I7 F - Stock options

s. 15 benefit due to shareholder receipt of stock options earned by corporation added to the ACB of the exercised shares

Publico determined to grant stock options to its directors and consultants, as a result of which a private corporation ("Corporation"), that had provided consulting services, was entitled to receive a grant of options. However, such options instead were granted directly to an individual sole shareholder of Corporation, who subsequently exercised and sold the acquired Publico shares, reporting a capital gain.

After determining that there was a s. 15 benefit to the shareholder at the time of her exercise of the options (being the excess of the fair market value of the acquired shares over the exercise price), the Directorate stated:

In so far as the shares in the capital stock of Publico acquired are capital property to Ms. X, the amount of the benefit … would be added in the computation of the cost of the shares, to Ms. X, under subsection 52(1). The cost of the shares for Ms. X should also include the exercise price of the options … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) double income inclusion under s. 56(2) or (4) to consulting corporation, and under s. 15(1) to its shareholder, where consultant's options issued directly by client to shareholder 109
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) s. 56(2) benefit where corporation implicitly consented to consultant's options being issued by client directly to its shareholder 164
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4) implicit transfer by corporation when stock options earned by it were issued directly by its client to its shareholder 169
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28) s. 248(28) does not prevent a double income inclusion to corporation under s. 56 and shareholder under s. 15 218
Tax Topics - Income Tax Act - Section 9 - Timing no s. 9(1) income inclusion from consultant being granted stock options until exercise 216
Tax Topics - General Concepts - Fair Market Value - Options stock options with no in-the-money value could have nil FMV 128

6 August 2013 External T.I. 2012-0469481E5 F - Benefit under trust

benefit on estate sale to beneficiary at under-value added to property's ACB

An estate sold personal-use real estate to one of its beneficiaries for a price less than the property's fair market value, so that s. 69(1)(b)(i) applied. The capital gain to the estate was payable to a beneficiary other than the purchaser.

CRA rejected a submission - that the exception in s. 105(1)(a) applied to exclude a taxable benefit to the purchaser because later in the same year the purchaser sold the property at a capital gain which was increased by the amount of the purchaser's reduced cost for the property. Accordingly, that difference represented a taxable benefit to the purchaser, but such amount was required to be added to the purchaser's adjusted cost base under s. 52(1) – with a resulting reduction in the capital gain on the subsequent sale.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) taxable benefit on sale to beneficiary at undervalue was not eliminated under s. 105(1)(a) when beneficiary sold the property 128
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) taxable benefit added to acb 129

3 January 2003 External T.I. 2002-014396 -

share subscription at under-value

When an amount was included in the income of an initial subscriber for a share of a corporation on the basis that the nominal subscription price was less than the fair market value of the share, the amount of the resulting benefit under s. 15(1) or 246(1) generally would be added to the ACB of the share to the purchaser pursuant to s. 52(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) 92

Income Tax Technical News, No. 11, September 30, 1997, "U.S. Spin-Offs (Divestitures) - Dividends in Kind"

The cost of shares received as a dividend-in-kind will be equal to the amount of dividend included in the shareholder's income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 90 - Subsection 90(1) 0

18 March 1993 Memorandum (Tax Window, No. 32, p. 7, ¶2599)

Where bond coupons are sold for an amount that is different from the discounted amount calculated pursuant to Regulations 7000(2)(b), a capital gain or capital loss will result.

October 1992 Central Region Rulings Directorate Tax Seminar, Q. N (May 1993 Access Letter, p. 233)

The amount included in income under s. 12(9) in respect of a prescribed debt obligation is added in computing the cost to the investor of that instrument under s. 52(1).

13 June 1991 T.I. (Tax Window, No. 4, p. 14, ¶1306)

Amounts included in income each year in respect of a prescribed debt obligation will be added in computing the adjusted cost base of the prescribed debt obligation.

Subsection 52(2) - Cost of property received as dividend in kind

Administrative Policy

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

property dividended has cost equal to FMV where subject to s. 55(2)

CRA indicated that where a dividend in kind paid by a corporation is subject to s. 55(2), the dividend recipient will be considered to have acquired the distributed property at a cost under s. 52(2) equal to its fair market value. CRA stated:

It would not be logical to say that a property received as a dividend in kind that was subject to the application of subsection 55(2) because its purpose was to increase cost or to reduce gain because of the increase in cost would, in turn, not have a cost.

(This position reverses 9830665.)

Locations of other summaries Wordcount
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
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3) - Paragraph 112(3)(b) - Subparagraph 112(3)(b)(i) stop-loss rule does not apply to the extent of the application of s. 55(2) 75

7 June 2017 External T.I. 2016-0671731E5 F - Transfer of life insurance policy by dividend in kind

proceeds and cost of distributed life insurance policy determined under s. 148(7) rather than s. 52(2)

A corporation (“Holdco”) holds a policy on the life of its sole shareholder with an adjusted cost basis (“ACB”), cash surrender value (“CSV”) and fair market value (“FMV”) of $200k, $240K and $450K, respectively. If Holdco transfers the policy to its shareholder as a dividend in kind, its proceeds of disposition (and his cost) will be only the CSV of $240K (so that its gain is $40K), since the FMV of the consideration received by it is nil.

CRA did not mention s. 52(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148 - Subsection 148(7) - Paragraph 148(7)(a) dividend-in-kind of a life insurance policy avoids the policy’s disposition at FMV 232

2013 Ruling 2013-0488291R3 - Reorganization of Corporations - Rollover

taxable dividend spin-off of thinly capitalized sub

Background

Pubco (a Canadian public company) wishes to spin-off Canco and Forco1 (a foreign affiliate) to its shareholders without incurring the expense of a plan of arrangement or holding a shareholders' meeting.

Proposed transactions.
  1. Pubco will incorporate Newco (a taxable Canadian corporation) and subscribe for common shares.
  2. Pubco will transfer its shares of Canco and Forco1, and a loan owing by Forco1, to Newco mostly in consideration for interest-bearing notes of Newco - as well as the issuance of preferred shares with a nominal redemption amount and subject to a price adjustment clause. The agreed amount in s. 85(1) elections will be the fair market value of the transferred properties.
  3. Pubco will declare and pay a dividend-in-kind to its shareholders consisting of the Newco common shares.
  4. Pubco will lend cash to Newco for an interest-bearing note.
  5. "To facilitate the payment of the Part XIII tax associated with the dividend in kind, PUBCO will cause Newco to repurchase shares of its capital stock from the affected shareholder with a value equal to the amount of the withholding tax owing, which will then be remitted to the CRA."
Rulings
  • Subject to s. 69(11), s. 85(1) will apply to the transfer in 2.
  • Per s. 52(2), Pubco will dispose of the Newco shares for their fmv and its shareholders will be deemed to acquire them at the same amount, which will also be the amount of the taxable dividend.
  • S. 84(3) deemed dividends will arise in 5 based on any excess of the repurchased shares' fmv over their PUC.
Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date no ruling on price adjustment clause 129
Tax Topics - Income Tax Act - Section 215 - Subsection 215(6) Spinco taking responsibility for Part XIII remittance obligation of Parent 206

Articles

Patrick W. Marley, Kim Brown, "Foreign Mergers and 'Demergers' Under Recent Canadian Proposals", Tax Management International Journal, 10 February 2012, Vol 41, No. 2, p. 86

Ademerger, which under the foreign corporate law, might be viewed as one stream splitting into two, might not qualify under draft s. 90(2) as a pro rata distribution on a class of shares of the foreign affiliate, with the result that s. 15(1) could apply. However, even if the demerger were considered to be a dividend, the demerged affiliate might be considered to have disposed of shares of the new foreign affiliates at fmv pursuant to s. 52(2), potentially resulting in the creation of hybrid surplus or additional fapi.

Subsection 52(3)

Administrative Policy

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

cost under s. 52(3) for stock dividend amount to which s. 55(2) applied

CRA indicated that since Finance’s intent is to give cost to the portion of the stock dividend that is supported by safe income, and also to a portion of the stock dividend that is technically subject to the application of s. 55(2), cost will be recognized under s. 52(3) for the amount of a stock dividend to which s. 55(2) has applied. (This position reverses 9830665.)

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 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
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3) - Paragraph 112(3)(b) - Subparagraph 112(3)(b)(i) stop-loss rule does not apply to the extent of the application of s. 55(2) 75

Paragraph 52(3)(a)

Administrative Policy

5 October 2018 APFF Roundtable Q. 4, 2018-0768891C6 F - Stock Dividend and Safe Income

different effect of stock dividend of high-low preferred shares paid to trust and corporate shareholders

The 100 common shares of Opco, having an aggregate FMV of $1,000,000 and an aggregate PUC and aggregate ACB to their holders, of $100, are held as to 25% and 25% by two unrelated holding companies (Holdco A and Holdco B) each wholly-owned by Mr. A and Mr. B and as to a further 25% and 25% by two discretionary family trusts for the families of A and B (Trust A and Trust B). The Opco common shares have an aggregate safe income of $400,000 ($100,000 to each shareholder).

Opco now pays a $400 stock dividend (valued at $400,000) of high-low preferred shares so that each shareholder receives 100 preferred shares with a PUC of $100 and a redemption amount of $100,000.

Consequences included the following:

  • By virtue of s. 55(2.3)(b), Opco's safe income that contributed to the capital gain on the 25 common shares of the capital stock of Opco held respectively by Holdco A and Holdco B would be reduced by $100,000.
  • By virtue of s. 52(3)(a)(ii), the 100 high-low preferred shares of each of Holdco A and B (with a FMV of $100,000) will have an ACB of $100,000.
  • Each Holdco’s 25 common shares (with an FMV of $150,000) will have an ACB of $25 and those 25 shares no longer have any safe income.
  • By virtue of s. 52(3), the safe income of $100,000 contributing to the capital gain on the 25 common shares of the capital stock of Opco held respectively by Holdco A and Holdco B before the payment of the stock dividend is now reflected in the ACB of the 100 high-low preferred shares received as a stock dividend by Holdco A and Holdco B.
  • As for Trust A and Trust B, immediately after the stock dividend, each of them will hold 100 high-low preferred shares having a redemption amount of $100,000 and, by virtue of s. 52(3)(a)(i) and para. (c) of s. 248(1) –amount, an ACB of $100.
  • Opco’s safe income contributing to the capital gain on the 25 common shares held by Trust A and Trust B, respectively, will be reduced by only $100, being the stock dividend received by Trust A and Trust B. However, that safe income amount will be split between the two classes of shares held by Trust A and Trust B based on the unrealized gain on each class – and, as noted, there now is significant unrealized gain on the preferred shares.
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.3) shift in safe income to high-low prefs paid as stock dividend 666
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.3) different effect of stock dividend of high-low preferred shares paid to Holdco and trust shareholders

Subparagraph 52(3)(a)(ii)

Administrative Policy

S3-F2-C1 - Capital Dividends

No denied increase where s. 55(2) applied to the stock dividend

1.30.1 Where a dividend that is deductible under subsection 112(1) results from the receipt of a stock dividend, subclause 52(3)(a)(ii)(A)(II) prevents what may be described as the non-safe income portion of the dividend being added to the cost of the stock dividend share. However, where the stock dividend is subject to the application of subsection 55(2), the CRA is of the view that the denied cost under subclause 52(3)(a)(ii)(A)(II) is not included in the cost of the stock dividend share for the purpose of calculating a capital gain or capital loss to determine the amount, if any, to be added to the corporation’s CDA, as described in ¶1.29.

12 December 2016 External T.I. 2016-0668341E5 F - Stock dividend

stock dividend deemed under s. 55(2.3)(b) to come out of safe income gave rise to full basis

Opco pays a stock dividend on its common shares (having a nominal paid-up capital and adjusted cost base) held by Holdco. The stock dividend is comprised of preferred shares with a nominal paid-up capital and a redemption amount equal to Opco’s safe income of $700,000. Opco then redeems the preferred shares for $700,000 and Holdco sells its Opco common shares to a third party for proceeds that reflect the $700,000 strip.

CRA indicated that s. 55(2) would apply to the preferred share redemption if the Part IV tax exception did not apply. However, given that the amount of the preceding stock dividend would be deemed by 55(2.2) for various s. 55(2) purposes to be $700,000, that amount would come out of the safe income of Opco under s. 55(2.3)(b) which, in turn, would mean that the cost of the preferred shares to Holdco would be deemed by s. 52(3)(a)(ii) also to be $700,000.

Accordingly, the application of s. 55(2) to convert the deemed dividend arising on the preferred shares redemption into proceeds of disposition would not result in any capital gain, given the stepped-up tax basis in the redeemed shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.3) - Paragraph 55(2.3)(b) safe income strip using a preferred share stock dividend 273

Articles

Rick McLean, Jeff Oldewening, Jonas Lau, "Capital Gains Stripping and Surplus Stripping", 2017 Annual CTF Conference draft paper

Two main competing interpretations of the “amount” of a stock dividend for purposes of s. 52(3)(a)(ii)(A) (pp. 13-15)

To apply the ACB computation rules for stock dividends, one must ascertain the “amount” of the stock dividend….there are five potential dividend “amounts” to consider.

First, subsection 248(1) defines the “amount” of the stock dividend as the PUC of the issued shares. This “amount” applies generally throughout the Act. …

Fifth, where subsection 55(2) applies to a non-safe income dividend, paragraph 55(2)(a) deems the "amount" not to be a dividend received by the dividend recipient and paragraph 55(2)(c) deems the "amount" to be a capital gain of the dividend recipient from the disposition of a capital property. Subsection 55(2) applies "notwithstanding any other provision of this Act". Therefore, it is possible that another dividend arises for purposes of the entire Act, consisting of the difference between the "amount" of the stock dividend determined under subsection 248(1) and the portion of that taxable dividend that is deemed by paragraph 55(2)(a) not to be a dividend….

The Department of Finance (Canada) considers that the "amount" of the stock dividend, under the ACB computation rules, is the dividend "amount" under subsection 248(1). This interpretation of the "amount" of the stock dividend for purposes of the ACB computation rules does not respect recharacterization under subsection 55(2). Where recharacterization applies, paragraph 55(2)(a) deems the "amount" of the dividend not to be a dividend received, and paragraph ,55(2)(c) deems the "amount" of the dividend to be a capital gain….

If the interpretation of the Department of Finance (Canada) prevails, the ACB denial rule can apply. The reason is that a portion of the subsection 248(1) "amount" of the stock dividend could exceed safe income on hand. As a consequence, the CDA penalty applies. This leads to under-integration….

Under-integration is eliminated where the "amount" of the stock dividend for purposes of the ACB computation rules is interpreted as the fifth possibility. Under this construction, the "amount" of the stock dividend for purposes of the ACB computation rules ought to be the difference, if any, between the subsection 248(1) dividend "amount" and the portion thereof that is recharacterized as a deemed capital gain….

[T]he Department of Finance (Canada) could study whether a simple rule could deem the amount of the safe income dividend to be the relevant "amount" of the stock dividend for purposes of ACB computation (and indeed for all other purposes of the Act). In that way, recharacterization of the non-safe income dividend as a deemed capital gain would be respected throughout the Act, as directed by the text of subsection 55(2).

Issue under s. 52(3)(a)(ii)(A) and (B) - B of the amount of a high-high stock dividend (pp. 16-17)

[I]magine a high-high stock dividend is paid on common shares, comprising the issuance of preferred shares with a high redemption price (and thus fair market value) of $100, and an equivalently high stated capital (and thus PUC) of $100. Assume that the dividend payer's safe income on hand attributable to its common shares held by the dividend recipient is only $70.

Subsection 248(1) sets the "amount" of the high-high stock dividend at the PUC of the preferred shares of $100. The special rules governing high-low stock dividends do not apply to adjust this dividend "amount". [fn 68: Paragraph 55(2.4)(b)] Rather, the general bifurcation rule in paragraph 55(5)(f) divides the high-high stock dividend of $100 into a safe income dividend of $70, and a non-safe income dividend of $30, solely for purposes of section 55. …

[A]s the high-high stock dividend implemented a safe income crystallization, one of the purposes of the stock dividend was to reduce a capital gain or the fair market value of common shares of the dividend payer significantly. Therefore, the non-safe income dividend is recharacterized as a deemed capital gain of $30.

The ACB to the dividend recipient of the preferred shares includes the total of the amounts determined under clauses 52(3)(a)(ii)(A) and (B). A critical issue becomes whether the "amount" of the high-high stock dividend is the subsection 248(1) "amount" of $100, or only the portion of that same dividend "amount" that remains after recharacterization in the amount of $70, for purposes of the ACB computation rules. …

If the dividend "amount" were $100, as suggested in the Technical Notes, the total of the amounts determined under clauses 52(3)(a)(ii)(A) and (B) is $100….

Clause 52(3)(a)(ii)(A) includes in ACB of the issued shares only the portion of the high-high stock dividend that is paid out of safe income on hand in the amount of $70. The reason is that the ACB denial rule in subclause 52(3)(a)(ii)(A)(II) applies to deny inclusion in ACB of the issued shares for the portion of the "amount" of the stock dividend that was not paid out of safe income on hand. Under clause 52(3)(a)(ii)(B), the amount of $30 that is determined under the formula "A + B" is added to ACB of the issued shares. In particular, variable "A" includes the amount of the deemed capital gain arising under subsection 55(2) in the amount of $30. Variable "B" computes to nil because paragraph 55(2.3)(b) did not apply.

If the dividend "amount" were only $70, as obtains if recharacterization of the non-safe income dividend as a deemed capital gain under subsection 55(2) were respected, the ACB of the issued shares remains $100….

Clause 52(3)(a)(ii)(A) still includes ACB of the issued shares the portion of the high-high stock dividend that is paid out of safe income on hand in the amount of $70. In this case, however, the ACB denial rule in subclause 52(3)(a)(ii)(A)(II) does not apply. No portion of the dividend "amount" exceeded safe income on hand.

Under clause 52(3)(a)(ii)(B), the amount of $30 that is determined under the formula "A + B" is added to ACB. Variable "A" includes the amount of the deemed capital gain arising under subsection 55(2) in the amount of $30. Variable "B" computes to nil because paragraph 55(2.3) (b) did not apply. …

If the dividend "amount" were $70, respecting recharacterization under subsection 55(2), the ACB denial rule does not apply. Consequently, the CDA penalty is not applicable. Integration is preserved.

In contrast, if the dividend "amount" were $100, the ACB denial rule applies because the dividend "amount" exceeded safe income on hand. Thus, the CDA penalty applies, leading to under-integration.

On that latter interpretation, solely for purposes of computing the dividend recipient's CDA, the ACB of the preferred shares becomes $130. For purposes of CDA only, ACB of the issued shares is computed by ignoring any reduction in cost basis under subclause 52(3)(a)(ii)(A)(II). On subsequent disposition of its preferred shares by the dividend recipient, a capital loss arises that grinds its CDA balance. In effect, after the preferred shares are sold, the CDA balance excludes the tax-free portion of the deemed capital gain arising under subsection 55(2).

Subsection 52(4) - Cost of property acquired as prize

Cases

The Queen v. Rumack, 92 DTC 6142 (FCA)

It was found that no inference could be drawn from s. 52(4) that a monthly annuity won by the taxpayer in a lottery was exempt from income tax.

Administrative Policy

84 C.R. - Q. 21

A prize of $1,000 per month has a cost equal to fair market value at the time of obtaining the right to the prize. Thereafter, ss.56(1)(d), 60(a) or 56(1)(d.1) will be applicable.

Subsection 52(6)

Administrative Policy

4 February 1992 T.I. (Tax Window, No. 16, p. 5, ¶1728)

Where at the time a taxpayer acquires a unit in a unit trust the value of the unit includes income payable by the trust at year-end and realized capital gains, on a subsequent redemption of the units s. 52(6) will attribute a cost to the right to receive the income and capital gains equal to the amount received in satisfaction of that right, and no gain or loss will arise.

IT-390 "Unit Trusts - Cost of Rights and Adjustments to Cost Base"

Articles

Botz, "Mutual Fund Trusts and Unit Trusts: Selected Tax and Legal Issues", 1994 Canadian Tax Journal, Vol. 42, No. 4, p. 1037.