2015-0610681C6 2015 CTF Q.6(d), Use of 84(3) Dividend

Principal Issues: Could one rely on the exemption under paragraph 55(3)(a) on a deemed dividend under subsection 84(3) to avoid the application of proposed subparagraph 55(2.1)(b)(ii)?

Position: No. The scheme of proposed subsection 55(2) is to counter artificial generation or manipulation of cost, as supported by proposed subsection 55(2.2) and the restriction of the application of paragraph 55(3)(a). See technical notes to the July 31, 2015 legislative proposals: "The amended exception in paragraph 55(3)(a) for related-person dividends is intended to facilitate bona fide corporate reorganizations by related persons. It is not intended to be used to accommodate the payment or receipt of dividends or transactions or events that seek to increase, manipulate, manufacture or stream cost base." The CRA will seek to apply GAAR to situations where ACB is artificially created or unduly preserved in a reorganization exempt under either paragraph 55(3)(a) or 55(3)(b).

Reasons: See response

Author: Ton-That, Marc
Section: 55(2), 55(2.1)(b), 55(2.2), 55(3)(a), 84(3)

2015 CTF Annual Conference
CRA Roundtable

Question 6(d): Use of 84(3) dividend

Proposed subparagraph 55(2.1)(b)(ii) does not apply to a deemed dividend under subsection 84(3).  Could one rely on a deemed dividend under subsection 84(3) to avoid the application of subsection 55(2) to the extent that the tests under paragraph 55(3)(a) are met?

CRA Response:

In addition to the prevention of capital gain strip, the scheme of proposed subsection 55(2) is to counter artificial generation or manipulation of cost, or reduction of FMV of a share as the reduction could potentially result in a fabricated loss on the share.  The proposed introduction of subsection 55(2.2) to prevent the use of a high-low stock dividend to reduce the value of the shares on which the stock dividend is paid (unless the stock dividend is deemed to come from safe income under proposed subsection 55(2.3)) supports that scheme.  So does the restriction of the application of proposed paragraph 55(3)(a) to dividends received on a redemption, acquisition or cancellation of shares since dividends in kind that have a purpose of increasing ACB or reducing FMV cannot be exempt simply on the basis that there is no unrelated persons involved.  A redemption or cancellation of shares would normally result in the elimination of the ACB of the shares that have been redeemed or cancelled, and therefore, would not normally be helpful in achieving the ACB creation or FMV reduction objective.  The technical notes to the July 31, 2015 legislative proposals stated the following:

“The amended exception in paragraph 55(3)(a) for related-person dividends is intended to facilitate bona fide corporate reorganizations by related persons.  It is not intended to be used to accommodate the payment or receipt of dividends or transactions or events that seek to increase, manipulate, manufacture or stream cost base.”

As such, an attempt to artificially create or unduly preserve ACB in a reorganization that would be exempt under either paragraph 55(3)(a) or 55(3)(b) would frustrate the object, spirit and purpose of the provision and the CRA would seek to apply GAAR to such situation.  Examples of situations that are considered offensive include the following:

* A note or other property (other than assets owned by the dividend payer at the beginning of the series that includes the redemption) received by a dividend recipient as consideration for a redemption of shares in a reorganization that is exempt under paragraph 55(3)(a) is used by a person to generate ACB that is significantly greater than the ACB of the shares that were redeemed.

* ACB is streamed prior to a reorganization that is exempt under paragraph 55(3)(a) or 55(3)(b) such that the redemption only applies to low ACB shares and high ACB is preserved in shares that are not redeemed.

Marc Ton-That
2015-061068
November 24, 2015

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