Tax free inter-corporate dividends at risk

Proposed changes to Section 55 of the Income Tax Act presented in the April 21, 2015 Federal budget are causing serious concern in the tax community with respect to inter-corporate dividends.

The proposed changes to Section 55 can convert what was formerly tax free inter-corporate dividends into capital gains (1/2 of which is taxable).

Of particular concern are dividends paid on “nominal value dividend sprinkling shares”. An example of this is where an individual owns 99 Class A shares and a holding company owns 1 Class B share of an operating company.  If a large dividend is paid on the single Class B share that exceeds the safe income attributable to this share:

• Previously, the related party exemption would allow this dividend to be received by the holding company tax free.  This would allow for a tax deferral until such time as a dividend is paid to an individual shareholder.
• Under the new rules, this dividend would be treated as a capital gain (1/2 of which is taxable) and the holding company will be required to pay tax on it in the year it is received.

Even though these changes have not passed into law yet, it is important to consider the changes to Section 55, because they will be retroactive to April 21, 2015 if and when they are eventually passed.

If you have paid any dividends prior to April 21, 2015 ensure that appropriate corporate resolutions and documentation support their payment.  If you have paid or are considering paying any dividends from your operating company to a holding company after April 21, 2015, please call us at 403-509-3290 or e-mail us to discuss how the transactions can be characterized until such time as we have greater certainty on the passing of these changes.