In a January 26, 2017 Tax Court of Canada case (101139810 Saskatchewan Ltd. vs. H.M.Q., 2014-2389(IT)G), at issue was whether Subsection 55(2) would recharacterize deemed dividends upon the redemption of certain shares into capital gains. In addition, the Court considered whether a designation under Paragraph 55(5)(f) (which essentially allows a portion of the deemed dividend to be protected from capital gains treatment by safe income) would be available. The Court determined that Subsection 55(2) would apply, and the taxpayer could make a late designation pursuant to Paragraph 55(5)(f).

As the rules governing the applicability of Subsection 55(2) and Paragraph 55(5)(f) have changed, the technical aspects of this case have limited precedential value. However, one item of significant note was the Court’s response to the taxpayer’s argument that the application of Subsection 55(2) in their case would result in double taxation and, therefore, contradict the principle of fairness.

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The Court responded “To find that Subsection 55(2) should not apply on the basis of fairness would be to offend Parliament’s express legislative intention. Parliament has clearly provided for this result, presumably to limit the potential for tax avoidance through the use of tax planning techniques.”