Canada: New Rules For Inter-Corporate Dividends

The 2015 federal budget introduced a number of amendments to subsection 55(2) of the Income Tax Act (the Act) that could have an impact on the tax treatment of certain inter-corporate dividends. Draft legislation released on July 31 kept most of the original proposals intact.

The following is a summary of the key changes and their possible impact.

Subsection 55(2)

Subsection 55(2) is an anti-avoidance rule intended to prevent the conversion of a taxable capital gain into a tax-free inter-corporate dividend. For example, it was intended to stop transactions where an Opco would pay a significant tax-free dividend to a Holdco, and then sell the shares of Opco for a much lesser amount. Due to its largely subjective "purpose" test and the availability of a number of exceptions that can get you out of the rules (for example, safe income dividends and butterfly reorganizations), subsection 55(2) has always been a very complicated provision to understand. Another key exception is the paragraph 55(3)(a) exception for related party dividends (this provision is addressed more fully below).

If subsection 55(2) applies, the portion of the inter-corporate dividend that is not sheltered by one of the exceptions is converted to proceeds of disposition, resulting in a taxable capital gain.

There are five main changes to the rules:

1 Broadening of the "purpose test"

2 Limitation on scope of related party exception

3 Changes for inter-corporate stock dividends

4 Allocation of safe income to certain types of shares

5 Changes to the Part IV tax exception

In its 2015 budget, the Department of Finance explained the mischief that it was trying to prevent. By using an inter-corporate dividend to cause the fair market value (FMV) of a share to fall below cost or the shareholder's cost of properties to increase, the shareholder could use the unrealized loss to shelter an accrued capital gain in respect of other property.

However, the proposals can potentially have a much broader impact than this. They apply to inter-corporate dividends received after April 20, 2015.

Broadening of the "purpose" test

One of the most notable differences between the old rules and the proposed rules is the addition of new "purpose" tests that could cause subsection 55(2) to apply. Under the old purpose test, subsection 55(2) could only apply where the purpose of the dividend was to reduce a capital gain on any share of capital stock immediately before the dividend was paid. Although this test continues to apply, the new added tests are no longer tied to a reduction in a capital gain, but can also apply where one of the purposes of the dividend is to effect either (a) a significant reduction of the FMV of any share or (b) a significant increase in the aggregate cost of property to the dividend recipient. This test can potentially be extremely broad, since the threshold for satisfying the "one of the purposes" test could be quite low. Adding to the subjectivity involved regarding what would constitute a "significant" reduction or increase, these new tests have created considerable uncertainty as to how they will be interpreted by the Canada Revenue Agency (CRA).

Limitation on scope of related party exception

The old rules also provided a related party exception to subsection 55(2) as long as the inter-corporate dividend was not paid as part of a series of transactions or events that involved an unrelated party. This exception applied to all types of dividends—cash dividends, stock dividends, deemed dividends, dividends-in-kind, etc.—and was commonly relied upon as a means to avoid subsection 55(2) in related party situations. However, effective for dividends received after April 20, 2015, the rules have been changed so that this exception now only applies to subsection 84(2) dividends and subsection 84(3) deemed dividends. This now puts all significant cash dividends that satisfy the "one of the purposes" tests at risk.

Changes for inter-corporate stock dividends

Under the old rules, the amount of a stock dividend for tax purposes was generally equal to the increase in paid-up capital of the issued shares (generally nominal). As a result, stock dividend shares could avoid being caught by subsection 55(2) as the amount of the dividend would be nominal. The proposed changes will essentially deem the "amount" of an inter-corporate stock dividend for purposes of applying section 55 to be the FMV of the issued shares. Consequently, high-low inter-corporate stock dividends that were previously not subject to a section 55 risk are now fully exposed.

Allocation of safe income to certain types of shares

One of the exceptions to being caught by subsection 55(2) is to show that the dividend was paid out of "safe income." The proposals have changed the way in which safe income is applied to dividends. Under the old rules, safe income could theoretically attribute to preferred shares if the preferred shares were entitled to share in the income of the corporation during the holding period. It was not always clear as to how this would apply to discretionary dividend preferred shares; however, this was seldom an issue due to the related party exception.

The proposed rules clarify that no safe income can attribute to dividends paid on discretionary dividend or dividend streaming shares (on the assumption that such shares cannot increase in value). Also, since safe income can only be applied to shares with a gain, no safe income can be allocated to loss shares. This was never an issue under the old rules; however, the new purpose tests discussed above provide that subsection 55(2) can now apply in loss situations.

Changes to the Part IV tax exception

Under the old rules, subsection 55(2) did not apply to any portion of a dividend for which the recipient was subject to Part IV tax that was not refunded to the recipient as a consequence of the payment of a dividend to a corporation (where that payment was part of the series of transactions or events). The new rules have narrowed the Part IV tax exception by providing that subsection 55(2) does not apply to any portion of a dividend for which the recipient was subject to Part IV tax that was not refunded to the recipient as a consequence of the payment of a dividend by the corporation as part of the series. This now includes situations where the corporation receives a dividend refund by paying a dividend to any person, including an individual, as part of the series.

What does this mean going forward?

A strict interpretation of the draft rules could cause the following types of common transactions involving inter-corporate dividends to be caught where a) the amount of the dividend is significant and b) one of the new "purpose" tests is satisfied:

  • Asset protection transactions
  • Capital gains exemption purification transactions
  • The payment of dividends on dividend streaming shares

The CRA has confirmed that standard in-house loss consolidation arrangements, whereby dividends are paid on preferred shares between related companies, would not be within the ambit of the new purpose test. On the other hand, a standard creditor proofing technique involving the declaration of a large cash dividend by an operating company to a holding company would generally satisfy one of the new purpose tests. In this situation, the company would have to rely on the safe income exception to avoid having the dividend reclassified as a capital gain. The CRA's unfavourable position on this matter has increased the importance of safe income on hand.

The proposed changes to Section 55 have added significant uncertainty and complexity to what was already a very complex section of our tax rules. The CRA has stated that, over time, this uncertainty should be lessened as future rulings and interpretations are issued. In the interim, there are means of structuring most transactions to ensure that one of the exceptions permitted in the Act are met. Nevertheless, extreme care should always be taken when planning transactions involving inter-corporate dividends.

Please contact one of our firm's tax practitioners if you would like to discuss how these new rules might impact you and your corporation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.