2018-0765271C6 CPA-CRA May 2018 meeting

Principal Issues: Application of purpose test in 55(2).

Position: Based on facts. See Ludco (2001 SCC 62).

Reasons: see below.

Author: Ton-That, Marc
Section: 55(2)

CPA-CRA Meeting May 2018 Winnipeg TSO

Question 11. Application of 55(2)

What guidance can be provided on the purpose test? Is there a CRA audit manual that could be made available? Other than regular course dividends, can the CRA provide examples where the purpose of the payment of the dividend is NOT to either:

a) Affect a significant reduction in the portion of the capital gain that, but for the dividend would have been realized on a disposition, OR

b) Affect a significant reduction in the fair market value of any share or a significant increase in the cost of the property?

CRA Response:

The Income Tax Audit Manual used by CRA employees involved in income tax audits of small and medium-sized businesses does not contain any information on the application of subsection 55(2) and the purpose test, in particular.

The purpose test in subsection 55(2) has been extensively discussed in numerous round table questions in the past few years.

We would like to refer you to Questions 8, 9, 11 and 12 of the CRA Round Table of the Canadian Tax Foundation’s 2015 Annual Conference, Question 2 of the TEI’s November 17, 2015 Liaison Meeting, Question 3 of the CRA Round Table of the Canadian Tax Foundation’s 2017 Annual Conference, Question B.6 of the TEI’s December 5, 2017 Liaison Meeting and Question 15 of the CRA Round Table of the 2017 Annual STEP Conference, and, finally the “Update on Subsection 55(2)” given by CRA’s officials at the Canadian Tax Foundation’s June 8, 2016 Technical Seminar on Recent Developments in the Taxation of Private Corporations.

We would like to reiterate the following:

The determination of purpose is based on facts that are particular to a situation, including, but not limited to, the actions taken by the parties to the dividend and their motivation.  In Ludco (2001 SCC 62), the Court was of the view that “in the interpretation of the Act, as in other area of law, where purpose or intention behind actions is to be ascertained, courts should objectively determine the nature of purpose, guided by both subjective and objective manifestation of purpose”.

We also said that “where a dividend is paid pursuant to a well-established policy of paying regular dividends and the amount of the dividend does not exceed the amount that one would normally expect to receive as a reasonable dividend income return on equity on a comparable listed share issued by a comparable payer corporation in the same industry, the CRA would consider that the purpose of the payment of such dividend is not described in proposed paragraph 55(2.1)(b).” Note that the CRA’s statement about “well-established dividend policy” is meant to provide a sense of comfort in some very low-threshold scenarios.  It is not meant to create a class of blanket exemptions for paragraph 55(2.1)(b).

Guidelines providing a greater level of comfort could be developed in the context of a ruling request with all the relevant facts.  As expressed previously at various venues, the CRA is 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.  A favourable ruling could be provided where all manifestations of purpose and corroborating circumstances support the absence of one of the purposes described in paragraph 55(2.1)(b).  The ruling 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 paragraph 55(2.1)(b) and on the completeness of the description of all the manifestations of such purpose and corroborating circumstances.  However, other than rulings on loss-consolidation, the CRA has not been deluged by requests for rulings on this topic.

Please refer to the following link for further details on ruling requests: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic70-6r7.html. 

Marc Ton-That
2018-076527
May 9, 2018
 

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