2017-0723491C6 2017 TEI – Question B6 - 55(2) guidance

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Rulings issued under 55(2)

Position: See document

Reasons: See document

Author: Ton-That, Marc

Section: 55(2)

2017 TEI Conference Round Table

Question B6:  Subsection 55(2) guidance 

TEI members remain concerned about how revised subsection 55(2) and, in particular, the broad purpose test in subsection 55(2.1) will be administered. Please provide a summary of CRA’s experience in addressing issues under these provisions, including examples of the type of rulings that are being granted and the kind of factual situations that have resulted in the CRA refusing to rule.

CRA Response:

At the November 2015 TEI Conference Round Table, we provided the following message:

"Although paragraph 19(h) of IC70-6R6 indicates that the CRA will not issue an advance income tax ruling in situations involving primarily a factual determination, the CRA will consider issuing a favourable opinion under proposed subsection 55(2) where all manifestations of purpose and corroborating circumstances support the absence of one of the purposes described in proposed paragraph 55(2.1)(b).  The opinion would be conditional on the representation made by the taxpayer that the purposes for which the dividend was paid do not include one of the purposes described in proposed paragraph 55(2.1)(b) and on the completeness of the description of all the manifestations of such purpose and corroborating circumstances."
At the CRA Income Tax Panel of the May 02, 2016 TEI Annual Conference, the CRA gave the following verbal message to the TEI:

"At the November 2015 TEI Conference, we outlined to you our understanding of the general application criteria for subsection 55(2) and our view of what would normally be involved in the determination of purpose for the application of subsection 55(2).  We basically reassured the tax community that, to us, a purpose test is not a result test as we intend to follow the guidelines established in Ludco (2001 SCC 62) that "purpose" has to be objectively determined, guided by both subjective and objective manifestations of purposes.  We also suggested that we would be open to consider rulings that involve the determination of purpose where taxpayers require some level of comfort regarding the application or non-application of subsection 55(2) to their proposed transactions.  Other than rulings on loss-consolidation, we have NOT been deluged by requests for rulings on this topic.  We would like to reiterate that we are "open for business" in that respect."

The message we are giving today is identical to the one that the CRA gave on May 02, 2016, after some 18 months.  We would like to reiterate that we are open to issuing income tax rulings in the circumstances described at the November 2015 TEI Conference Round Table.

We would also like to inform you that we have met with some representatives of the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada on October 23 in Ottawa.  The meeting was to discuss a deck of 96 slides that the Joint Committee has submitted to us before the summer on various perceived issues on section 55 and examples that illustrated such perceived issues.  Some issues that were raised were issues that existed with the old 55(2) regime and that may or may not be exacerbated by the new regime.

We informed the Joint Committee that, with respect to certain questions that were asked, we do not have further clarification to make since they have already been addressed by the CRA through various vehicles and forums (i.e., round tables, conferences and technical interpretations). Those were questions about calculation of safe income, creditor-proofing dividends, ordinary course dividends, safe income on discretionary dividend shares, same-class stock dividends, etc…

There was a second category of questions that will require further study and possibly some discussions with our colleagues of the Department of Finance and a response to those questions will be published in the following months in the form of technical interpretations.  Those were questions on the impact of the application of 55(2) to the computation of cost, calculation of CDA, the GRIP, LRIP accounts and the application of 112(3).

Finally, there was a third category of questions that we found interesting and that required a quick response from the CRA in order to provide further guidance to the tax community.  That third category of questions has been incorporated in the CRA Round Table Discussion of the 2017 Canadian Tax Foundation annual conference.


Marc Ton-That
December 5, 2017

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