Risk & Business Magazine Cain Insurance Fall 2015 | Page 30

R
& Inter-Corporate Dividends
B Tax Free....... Right?
BY: DAVE ARMSTRONG, PARTNER, EPR DAYE KELLY & ASSOCIATES

B

usiness owners and their advisors
often rely on certain exemptions in
the Canadian Income Tax Act (“ITA”)
to allow for corporate assets to be
transferred from one corporation to
another, income tax free. This seems to
make logical sense; for example:

• A dividend by its nature is a payment
of a corporation’s retained earnings to
its shareholder.
• Retained earnings represents
accumulated taxed income of the
corporation.
• Mr. A owns 100% of A Co., and
• A Co. owns 100% of B Co.,

Mr. A

100%

• Paying a dividend from B Co. to A
Co. should intuitively not attract any
additional corporate income tax.

A Co

100%
B Co

dividend

In general, prior to the 2015 federal
budget Canadian Controlled Private
Corporations (“CCPCs”) were able
to undertake the above and similar
transactions to shift assets free of
corporate income tax from one related
CCPC to another. However, certain rules
contained in the ITA were expanded
on April 21, 2015. Corporations need
to consider the applicability of the
modified tax rules as they navigate the
provisions contained in the ITA. The tax
laws referred to above are known as the
capital gains stripping anti-avoidance
rules. They are contained in subsection
55(2) of the ITA and the 2015 budget

proposes to broaden their application
to more situations. If subsection 55(2)
applies, an otherwise income tax exempt
inter-corporate distribution is treated as
a capital gain subject to income tax. To
illustrate the impact, consider a taxable
New Brunswick CCPC (“NB Co.”) paying
or deemed to have distributed an intercorporate amount of $1 million dollars.
NB Co. could be faced with a surprising
corporate income tax bill of $233,500 if
caught by the expanded rules.
If a corporation is undertaking any
transaction involving a significant
inter-corporate dividend (effective after
April 20, 2015), business owners should
ensure their advisors have reviewed the
applicability of the modified rules. All
types of inter-corporate distributions
must be examined: deemed dividends,
stock dividends, in-kind dividends, and
even straight forward cash dividends.
Relying on previous subsection 55(2)
exemptions could result with a nasty
surprise.
The Department of Finance released
for consultation draft legislation and
explanatory notes on July 31, 2015 which
serve to implement the proposed changes
to subsection 55(2) of the ITA. It is
unlikely the changes will become law
before the upcoming federal election
on October 19, 2015. This generates
some uncertainty for business owners
planning post 2015 budget transactions.
However, it is important to note that the
proposed legislation will have retroactive
application to April 21, 2015 if eventually
passed as tax law. If the draft legislation
is contained in a bill and the bill receives
first reading in the House of Commons,
it will likely become law if a majority
government resumes post-election.

Dave Armstrong is a tax partner with EPR
Daye Kelly & Associates in Fredericton.
He specializes in Canadian income tax
matters and estate planning.

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RISK & BUSINESS MAGAZINETM FALL 2015