CHAPTER 1 – BASE CASE TAX RATES
s.123(1)(a)
s.123.4(2)
s.124(1)
s.14(2) BC
117(2)(c)
s.4.1(e)
38%
is the base federal rate for corporations
(10%) general rate reduction: applies to full rate taxable income
123.4(1) full rate taxable income excludes specific types of income that are caught
by rate deductions in other sections, namely, CCPCs and investment corporations.
123.4(1) general rate reduction percentage the total of (c) 9% for 2009.
(10%) provincial abatement
11%
provincial corporate income tax
30%
BASE CASE CORPORATE RATE
29%
top individual federal rate
14.7% top individual provincial rate
43.7% TOP INDIVIDUAL RATE
*Absent the gross up/DTC system, there is a significant disintegration between (1) income earned through a
corporation and distributed as a dividend to an individual and (2) income earned by an individual.
The Gross-Up and Dividend Tax Credit System
s.12(1)(j)
s.82(1)
(a)
(a.1)
(b)
dividends from resident corporations included in individual income.
individual income is ‘grossed up’ through:
adding the amount by which received non-eligible dividends exceed paid non-eligible dividends
adding the amount by which received eligible dividends exceed paid eligible dividends
if the taxpayer is an individual, other than a trust or charity,
(i) 25% of the non-eligible dividend gross up
(ii) 45% of the eligible dividend gross up
s.121
(a)
(b)
s.4.69
(a)
(b)
Federal Dividend Tax Credit System
2/3 of the amount that is required by s.82(1)(b)(i)
11/18 of the amount that is required by s.82(1)(b)(ii)
Provincial Dividend Tax Credit System
21% of the gross up for ordinary dividends, s.82(1)(b)(i)
354/9% of the gross up for eligible dividends, s.82(1)(b)(ii)
* Ideally, the Gross Up amount should be equal to the DTC.
*Ordinary dividends: 2/3 of the DTC is federal, with the remaining 21% provincial. So, for a BC resident, the total
DTC is 87.67% of the gross-up. Result is a disintegration of around 9%. This is partially offset by 13.7% deferral
advantage (the difference between top rate individual tax and corporate base case).
*Eligible dividends: have a DTC equal to 96.55% of a higher gross up (45%). This DOES achieve integration.
* The Gross-Up and DTC scheme does not apply to inter-Corporate dividends
*Consider the implication for an individual who is not taxed at the top rate. Refer to example on P.11, a low-rate
individual can receive up to 30k of dividends tax free. However, note the existence of the ‘kiddie tax’, which
assigns the ‘income’ earned by children to their parents.
CHAPTER 2 – CLASSIFICATION OF CORPORATIONS
Definition of a Private Corporation/Legal Control
s.89(1)
private corporation is a resident in Canada and is not, or not controlled by, a public corporation
Resident in Canada
s.250(4)
a corporation shall be deemed a resident if (a) it was incorporated in Canada after 1965 (b)
foreign corporation w/ elements of Cdn. ownership (c) before 1965 if carried on
business/was resident in Canada.
s.250(5.1)
where a corporation is continued in a Cdn. jurisdiction it will be deemed to have been
incorporated in that jurisdiction.
s.250(5)
a person is deemed not to be a resident of Canada if that person is deemed to be a resident
of another country under a tax treaty.
Common Law
a corporation incorporated in a foreign jurisdiction may have Cdn. residency if mind,
management and control reside in Canada.
Not a public corporation
s.89(1)
public corporation listed on a designated stock exchange or has elected to be public
Not controlled by a public corporation
Common Law
s.256(6.1)
(a)
(b)
Legal (de jure) control is generally defined as 50% of votes (power to elect the BoD). This
control is defined by corporate law statutes, the articles, and unanimous shareholders
agreements.
Simultaneous Legal Control
where a subsidiary would be controlled by a parent if the parent were not in turn controlled
by another person/group of people, the subsidiary is controlled by: (i/ii) the parent and any
person or group of people by whom the parent is controlled.
where a subsidiary would be controlled by the first tier group if no corporation in the group
were not in turn controlled by another person/group of people, the subsidiary is controlled
by: (i/ii) the first tier group and any group of one or more person in respect of the first tier.
Definition of a CCPC
s.248(1)
s.89(1)
s.89(1)
s.248(1)
(a)
(b)
(c)
Canadian controlled private corporation is a private corporation that is a Canadian corporation.
private corporation is defined above.
Canadian corporation means a corporation that is resident in Canada and was (a)
incorporated in Canada or (b) was resident in Canada since 1971 and amalgamated w/ a
Canadian corporation.
Canadian controlled private corporation ... other than
a public corporation
a corporation that is controlled directly or indirectly in any manner whatever (factual
control) by any combination of publics and non-residents.
a corporation that would be legally controlled by a fictional person if that person owned all
the public/non-resident shares.
*(c) overrides the decision in Silicon Graphics
Factual Control
s.256(5.1)
s.256(6)
s.251(5)(b)
CASES
Where the expression “controlled directly or indirectly in any manner whatever” is used, a
corporation shall be considered to exercise control where they have any direct or indirect influence
that would, if exercised, result in control in fact of the other corporation....Except where arms
length and franchise/license/lease/distribution/etc. agreement.
Factual control deemed not to exist where a creditor exercises indirect control for the purpose of
securing a loan.
Factual control deemed to exist where at any time a person has the right to acquire/redeem/cause
reduction in voting rights in shares that would give that person control (other than as a beneficiary
in death, bankruptcy, disability, etc).
*Administrative exception to this rule. The CRA will not deem rights to have been exercised
in shotgun clauses.
Silicon Graphics: must be a common link or interest for factual control
Lenester Sales: Division of the SBD between companies. This fell within the franchise exception for
factual control and did not meet the legal control test (avenue to affect the board of directors) laid
out in Silicon. Ratio: Giant Tiger did not control the two stores.
Transport Couture: Factual control found because of (1) economic dependence (2) operational
control and (3) family relationship between the shareholders.
CHAPTER 3 – Special Rate for Active Business Income of CCPCs
The Small Business Rate
s.123(1)(a)
s.123.4(2)
s.124(1)
s.125(1.1)
s.16 BC
38%
0
is the base federal rate for corporations
general rate reduction applies to full rate taxable income
123.4(1) full rate taxable income (b)(ii) is the excess of amounts determined under
paras. 125(1)(a-c) income available for the SBD.
(10%) provincial abatement
(17%) small business deduction
11%
NET FEDERAL SMALL BUSINESS RATE
2.5% provincial small business rate
13.5% NET COMBINED SMALL BUSINESS RATE
*Recall that dividends paid by this company must be characterized as “eligible” or “ordinary” to determine the
gross-up/DTC scheme. Ordinary dividends paid by a qualifying small business integrate perfectly.
*The lower corporate tax rate combined with the deferral advantage leaves more cash in small businesses.
Calculating the Deduction
s.125(1) – Canadian-controlled private corporation may deduct the SBD rate * the least of the total of:
(a)(i/ii) – net income of the corporation from an active business carried on in Canada income plus net specified
partnership income
Add Active Business
s.125(7) – Income of the corporation for the year from an active business is the income from an active business
(including any income incident to that business) other than income from a source that is property (defined in
s.129(4)).
s.125(7) – active business is anything other than a specified investment business or a personal services business
and includes an adventure or concern in the nature of trade.
s.125(7) – specified investment business principle purpose is to earn income from property (interest,
dividends, royalties, rents) except (1) leases other than real property (2) has 5 full time employees (3)
associated corporation provides services that would require 5 full time employees.
*Refer to Lerric for the five employee rule: there must be a direct connection between corporation
and the employees (cannot apportion employees in a joint venture).
s.125(7) – personal services business working individual (or someone related to them) is a specified
shareholder OR the working individual could reasonably be regarded as an employee if the corporation
were disregarded except where (1) there are 5 employees or (2) amounts payable to the business are
receivable from an associated corporation.
s.18(1)(p) details deductions available for personal services corporations (they are fairly limited)
* Refer to S&C Cross: Court will take into account economic realities, but will not abrogate
legal relationships. Court went through independent contractor test (degree of control,
supply own tools, risk of loss, chance of profit).
s.129(4) – income or loss from a source that is property is (a) income from a specified investment business
BUT NOT (b) income/loss from a property that is (i) incident to an active business or (ii) that is used or held
principally for the purpose of gaining or producing income from an active business carried on by it.
s.129(6) – Investment income from associated corporation deemed to be active business income. Rules that
apply to payments from an associated corporation to a recipient corporation where the payment would
otherwise be characterized as income from property by the recipient.
(a) In computing property income, (i) do not include any amount that was paid to the recipient and
deducted by the associated corporation while carrying on an active business in Canada. BUT (ii) no
deduction for recipient corporation for any outlay they made for the purpose of producing the deduction
in (i).
(b) for the purposes of s.125(1)(i) the deductible portion shall be deemed to be income from an active
business carried on in Canada by the recipient corporation and (ii) an outlay or expense referred to in
(a)(ii) shall be deemed to have been made or incurred by the recipient corporation for the purpose of
gaining or producing income (i.e. it does not reduce their property income). Refer to diagram on P.83/84.
*Material review s.129(6): Examples are rent and loan interest. Investment income exception between two
associated CCPCs. Called the source preservation rule because it prevents conversion of active business income
to property income. However, this rule is irrelevant because no one would want to do this. The reason is that
active business income is tied to the enhanced dividend tax credit (i.e. you want as much active business
income as possible), and therefore the deferral advantage.
Add Partnership
s.125(7) – specified partnership income is A + B
A: lesser of G – H OR (K/L)*M
G – H: Corporation’s income share – Corporation’s expense share
(K/L)*M: (Corporate share/PSHP income)*(Small Business Limit)
*Essentially the lesser of net income (at the partnership level) or the
maximum allowance.
B: Assume Zero
s.125(6.2) – Where a foreign resident/public corporation exercises factual control over the
partnership at any time during the year, specified partnership income is deemed to be nil.
s.125(6.3) – There is deemed control where the partner’s share of income exceeds 50%.
s.125(1)(c) – the corporation’s business limit for the year (is the maximum amount claimable).
Other Rules
s.125(2) – Business limit for the year is 500k unless the corporation is associated with one or more CCPCs, then nil.
*Note that the provincial limit is 400k (s.16 of Provincial Act).
*Note the scheme to reduce active income through executive bonuses.
s.125(3) – Associated Corporations may file an election to divide the small business limit between them.
* Refer to the Lenester case (Chapter 2) and the 2 franchisees. They did not have to divide the limit between
themselves.
s.125(4) – If there is a failure to file the division election, the minister will divide the limit according to some rules
s.125(5.1) – Large CCPC adjustment. A CCPC’s business limit for the year is the amount by which the business limit
otherwise determined exceeds the formula A*(B/11,250).
A = Is the amount that would otherwise be the business limit for the year.
B = O.225% x (D – 10M), where D is the taxable capital employed in Canada by the corporation and its
associates. So, for example:
at 10M, the company gets the full 500k
at 13M, the company gets 300k
at 15M, the company gets nothing
Associated Rules
s.256(1) Associated Corporations (A and B) where
(a) there is legal or factual control between them
(b) both corporations are controlled in fact by the same person or group of persons
(c) Corp A factual controller is related to Corp B factual controller AND owns 25% of a non-specified
class of shares in Corp B.
(d) Corp A factual controller is related to each member of a group of persons who factually control
Corp B AND owns 25% of a non-specified class of shares in Corp B.
(e) Corp A controlling group is related to each member Corp B controlling group AND individually or
collectively, own 25% of a non-specified class of shares of Corp B.
s.256(1.1) specified class of shares are non-convertible/exchangeable, non-voting, fixed dividend,
and cannot exceeds a prescribed rate of return. Are analogous to debt. Allows people to have a
stake in multiple corporations without associating them.
s.256(2) Corporations deemed associated through mutual association with a third corporation unless the
third corporation breaks the association by electing out of the s.125 deduction OR, the third corporation is
not a CCPC. Refer to diagram on P.87.
s.256(1.2) Control Rules (In addition to legal and factual control rules)
(a) a group of persons in respect of a corporation means any two people who own
capital stock.
(b) for greater certainty
(i) control by a group member means control by the group.
(ii) simultaneous control between controlling group member and group.
(c) deemed control where
(i) ownership of 50% or more of the FMV of issued capital stock by a person
or group.
(ii) common shares of capital stock ... same as above.
*Specified shares (non-voting, non-exchangeable, fixed dividends which do
not exceed the prescribed rate of interest, and redemption value is no
greater than issue value), which are essentially equal to debt, are not
included in this calculation.
s.256(1.2) Deemed Share Ownership (For the 25% and 50% legal control rules)
(d) where a holding company owns shares of a subject corporation, the
shareholders of the holding company are deemed to own shares of the subject
corporation in proportion to the value of their shares in the holding company.
(e) where a partnership owns shares of a subject corporation, the partners will be
deemed to own shares of the subject corporation in proportion to their share of the
partnership income or loss.
(f) where a trust owns shares of the corporation (i) each discretionary beneficiary is
deemed to own all the shares and (ii) each fixed beneficiary is deemed to own their
proportion.
(g) in determining fair market value, all shares will be assumed to be non-voting.
s.256(1.3) Parent deemed to own shares where there is a child under 18 years of age unless
the child manages the business and affairs of the corporation.
s.256(1.4) Options and Rights For the purpose of determining association, where a person
has the right, absolutely or contingently, (a) to acquire shares that person is deemed to own
those shares, subject to death, bankruptcy, disability, exceptions or (b) to cause a change in
the share structure, it will be deemed to have happened when assessing the control
relationship.
* Recall 256(6) where options are not deemed to control where they act as creditor
security.
s.256(4/5) – Common Trustee/Executor two corporations are deemed not to be associated
simply by virtue of being controlled by the same Trustee or Executor.
s.256(2.1) General Anti-Avoidance Rule. Where the separate existence of two corporations can be reasonably
attributed to reducing tax payable, or increasing the s.125(7) refund, the corporations shall be deemed to be
associated.
* Refer to Hughes Homes. Intention to avoid tax must be established subjectively, which is a pure question of fact.
The onus is on the taxpayer to rebut the assumptions and conclusions reached by the Minister.
Related Persons
s.251(2) Related Persons
Individuals Related to Corporations
(a) existence of a blood relationship, marriage, CL partnership, or adoption
(b)(i) to a corporation where the person is related to an individual who exercises legal control over that
corporation
(b)(ii) to a corporation where the person is related to one member of a related group that exercises legal
control over that corporation
(b)(iii) any person related to an individual described in (i) or (ii).
Corporations Related to Each Other
(c) two corporations where
(i) they are controlled by the same person or group of persons
(ii) the controlling persons are related. *Materials note the distinction from association. In order to be
associated, there would also have to be a cross shareholding.
(iii) Corp A is controlled by a person who is related to any member of a related group that controls Corp B.
(iv) Corp A is controlled by a person who is related to each member of an unrelated group that controls Corp
B.
(v) If any member of a related group that controls Corp A is related to each member of an unrelated group
that controls Corp B.
(vi) If each member of an unrelated group that controls Corp A is related to at least one member of an
unrelated group that controls Corp B.
s.251(6) Relationships (a) blood relationship is lineal descendants and siblings (b) marriage is spouse
and their blood-relatives (c) common law is common law spouse and in-laws (d) adoption legally or
in fact
s.248(1) common law partner (a) 12 month continuous cohabitation (b) are parents of the same
child and cohabitate in a conjugal relationship.
s.251(4) related group means a group of persons each of whom is related to every other member of
the group. Unrelated group is any group not a related group.
s.251(3) Third party relationship. Where two corporations are related to the same corporation within the meaning
of (2), they shall be deemed to be related. *Refer to email reply about multiplying the third party relationship
provision in the context of a public company. I.E. The deemed rule ends at an indirect relationship.
s.251(5)(a) For the purposes of (2) and CCPCs (defined in s.125(7))
(a) where a related group is in a position to control a corporation, it shall be deemed to have control
whether or not it is part of a larger group by which the corporation is in fact controlled.
(b) where a person has a right to (i) acquire share (other than on death or bankruptcy), that person is
deemed to own the shares (ii) acquire, control, or reduce votes, that person is deemed to have exercised
them.
(c) where a person owns shares in two corporations, that person is deemed to be related to himself.
CHAPTER 4 – REFUNDABLE TAX FOR PRIVATE CORPORATIONS
Defining Aggregate Investment Income
s.129(4)
(a)
aggregate investment income is
(i) the amount by which eligible capital gains exceed eligible capital losses and (ii) net capital losses
from other years.
s.129(4) – eligible portion is the portion of capital gain or loss from a disposition of property that cannot be
reasonably be regarded as having accrued while the property was a non-CCPC. *Accrued gains while held by
a non-CCPC are not eligible.
(b)
the corporation’s net income for the year from a source that is property, excluding inter-corporate
dividends.
s.129(4) – income or loss from a source that is property is (a) income from a specified investment business
BUT NOT (b) income/loss from a property that is (i) incident to an active business or (ii) that is used or held
principally for the purpose of gaining or producing income from an active business carried on by it.
*Refer to Shamita v. The Queen.
Tax Rate Applied to Investment Income
s.123(1)(a)
s.123.4(2)
s.124(1)
s.123.3
s.14(2) BC
38%
is the base federal rate for corporations
0
aggregate investment income is backed out of full rate taxable income, therefore the
general
rate reduction is not applied to it.
(10%) provincial abatement
6.67% additional federal tax applied to aggregate investment income
11%
provincial corporate income tax
45.67% INITIAL CORPORATE TAX ON AGGREGATE INVESTMENT INCOME
*The point of this scheme is to take away the deferral advantage of earning investment income through a CCPC as
opposed to personally. A portion of this tax is refundable when dividends are paid out to the shareholder (who,
in turn, pays personal tax on the dividend).
The Refund
s.129(1)(a) Dividend refund to a private corporation. When the company files a return, the minister refunds the
lesser of (i) 1/3 of all the taxable dividends paid by the CCPC in the year and (ii) the balance of the RDTOH account.
s.129(3) RDTOH is the amount by which (a) 262/3% of aggregate investment income for the year + (b) taxes
payable under Part IV + (c) the RDTOH at the end of the last year (net any refund given in that year).
*Recall s.129(6): investment income exception between two associated CCPCs. Called the source
preservation rule because it prevents conversion of active business income to property income. However,
this rule is irrelevant because no one would want to do this. The reason is that active business income is tied
to the enhanced dividend tax credit (i.e. you want as much active business income as possible), and
therefore the deferral advantage.
s.129(1.2) GAAR: Where a dividend paid on a share of the capital stock of the corporation and the main purpose of
the share’s acquirer was to entitle the corporation to a dividend refund under (1), it shall be deemed not to be a
taxable dividend (i.e. it will still be taxed at the individual level).
*Dividends paid from the RDTOH investment account are ordinary dividends (they are not paid from GRIP, which is
equal to taxable income minus small business deduction claimed and investment income).
Policy re: Inter-Corporate Dividends
82(1)(a)
s.112(1)
Inter-corporate dividends must be included in corporate income
Corporation’s may deduct inter-corporate dividends from their taxable income.
* Recall s.129(4)(b), that inter-corporate dividends are excluded from the definition of aggregate
investment income. They are caught by the Part IV tax scheme.
*Part IV tax is designed to prevent a deferral advantage where a private company holds inter-corporate dividend
income on behalf of the taxpayer (Refer to diagram on P.133).
Part IV Tax
s.186(1)(a) Tax on assessable dividends received by private corporations or subject corporations (particular
corporation)
(a) equal to 1/3 of the assessable dividends received, other than dividends received from a connected
corporation
s.89(1) private corporation is a resident in Canada and is not, or not controlled by, a public corporation
*Refer to further definitions in Chapter 2 re: resident of Canada, public corporation, and rules for control.
s.186(3) subject corporation not a private corporation resident in Canada and controlled by or for the benefit of
an individual or group of individuals (does not include a trust). *Rare case
s.186(5) a subject corporation is deemed to be a private corporation for the purpose of the RDTOH refund.
s.186(3) assessable dividend is a dividend that is deductible under s.112(1).
s.186(4) A corporation is connected to the payer corporation if
(a) the payer corporation is controlled by the particular corporation. Exception where control is deemed by
s.251(5)(b): right to acquire shares is deemed to have been exercised. OR
(b) if the particular corporation owns more than 10% of the voting shares in the payer corporation and have
a fair market value of more than 10% of the capital stock of the payer corporation.
s.186(2) A corporation is controlled by another if more than 50% of its share capital (w/ full voting rights)
belongs to the other corporation or non-arms length shareholders of the other corporation.
s.251(1)(a) Related persons shall be deemed not to deal at arm’s length (see chapter 3)
s.186(1) a particular corporation will pay a tax equal to
(a) 1/3 of assessable dividends received, other than from connected corporations
(b) an amount in respect of a dividend received from a connected corporation equal to the proportion of the
payer’s dividend refund under s.129(1)(a). The proportion = the amount of the dividend received by the
particular corporation / the total of all taxable dividends paid by the payer corporation. *Refer to example on
P.138.
*Note that inter-corporate dividends retain their “eligible” status because they are added to the receiving
corporation’s GRIP account. They trigger part IV tax in the same way and are paid to individuals as eligible
dividends.
The Capital Dividend Account
The taxable half of the disposition goes into aggregate investment income.
The tax-free half of the disposition goes into the capital dividend account.
s.89(1) capital dividend account the total of
(a) the tax free one half of the disposition, less one half of capital losses.
(b) capital dividends from other companies under s.83(2)
(c) the tax-free portion of gains from eligible capital property
(d) life insurance proceeds
(e) the tax-free portion of capital gains flowed through trusts (such as mutual funds)
*Note that these are only added at the end of the year. So there is a trap in paying out capital dividends too
early.
s.83(2) The corporation may declare a tax-free capital dividend (from the capital dividend account) that is not taxed
at the individual level.
s.184(2) If the corporation pays a capital dividend in excess of the capital dividend account, a there is a 60%
penalty tax on the excess.
s.184(3/4) However, the corporation may elect (if all shareholders agree) to treat the excess as a taxable
dividend within 90 days of the penalty tax assessment.
s.83(2.1) GAAR: Where a share is received solely for the purpose of receiving a capital dividend it will be deemed to
be a taxable dividend.
CHAPTER 5 – GRIP AND ELIGIBLE DIVIDENDS
s.89(1) Eligible dividend. A taxable dividend received by a person resident in Canada, paid by a corporation resident
in Canada and designated, as provided under (14) to be an eligible dividend.
s.89(14) A corporation designates a dividend it pays at any time to be an eligible dividend by notifying the
recipient in writing.
s.89(1) General Rate Income Pool. Calculated at the end of each taxation year of a CCPC by the formula A – B
A: is a positive or negative amount determined, before taking into account future tax consequences, by the
formula: C + 0.68(D – E – F)
C: is the GRIP at the end of the preceding year.
D: the corporation’s taxable income for the year.
E: Small Business Deduction in the year under s.125(1).
F: Lesser of aggregate investment income and taxable income
s.89(1) Low Rate Income Pool. Applies to non-CCPCs and is computed at the time the dividend is paid.
*Note that a corporation with outstanding LRIP must exhaust that account through ordinary dividends
before it may declare eligible dividends.
s.89(1) Excessive Eligible Dividend Designation. Is made in respect of an eligible capital dividend.
(a) Unless (c) applies and the corporation is a CCPC, determined by the formula (A – B) x (C/A).
A: the amount of all the eligible dividends paid in the taxation year.
B: the greater of nil and the GRIP at the end of the year
C: the amount of the eligible dividend paid at any time in the taxation year.
(b) Unless (c) applies and the corporation is not a CCPC, determined by the formula A x (B/C)
A: the lesser of (i) the total of all amounts of eligible dividends paid by the corporation and (ii) the
corporations LRIP at the time.
B: the amount of the eligible dividend
C: the total of all amounts of eligible dividends paid by the corporation
(c) AAR. An amount equal to the amount of the eligible dividend that could be reasonably considered to be
a part of a series of transactions to maintain or increase the GRIP income pool or maintain or decrease the
LRIP.
*Note that excess eligible dividends are liable to a tax of 20%. Shareholders who receive the excess
are jointly and severally liable. Liability is determined based on the proportion of the excess that
was paid to them, s.185.2(3).
*s.185.1(2) allows the corporation to elect to treat the excess as an ordinary dividend (but must
have the concurrence of the corporation and its shareholders)
*An additional tax of 10% is levied if the anti-avoidance rule applies.
CHAPTER 6 – SHAREHOLDER BENEFITS AND
SHAREHOLDER LOANS
s.15(1)
Benefit conferred on shareholder. A benefit conferred by a corporation, not including:
(a) reduction of PUC, or share buy-backs, or on winding-up, or any other s.88 transaction.
(b) payment of a dividend or a stock dividend
(c) rights to acquire additional identical shares
(d) an action described in 81(1)(c.1)/(c.2)/(c.3) – Deemed dividend on share cap. addition.
an except to the extent it is deemed by s.84 to be a dividend, be included in computing the
shareholder’s income for the year.
Valuation of the Benefit
(1) Original Cost
(2) Current FMV
(3) Hourly Rate for Use
(4) Return on Investment: the default approach. Calculated by multiplying the initial value by the prescribed prime
rate (roughly equals corporate opportunity cost).
Youngman: Taxpayer put money into a company (which also took out a bank loan) to build a home on land that the
company had purchased on a failed deal. The Court does not accept that the home was built for business
purposes. With respect to valuation, the Court does not value the benefit on the basis of rent, but rather fair
market value because it was constructed specifically for the shareholders needs.
Hinkson: Central issue in this case was whether the couple was holding the Florida property for business or
pleasure. Holds that there is not hard test, rather, each case will be determined on the facts. The basis for the
valuation was FMV, not cost.
Franklin: Bad bookkeeping system. He always put more into the company than he ever took out, even though the
amounts were never recorded (thus his net loan position never changed). It did not matter whether the error
was on purpose or not, the main point is that there was no benefit (note that if Franklin withdrew the misrecorded loans, he would have been in a better position).
SHAREHOLDER LOANS
*CRA Policy: Will it ever be repaid? Is the company charging a fair rate of interest?
s.15(2)
Shareholder Debt. Where a person (other than a corporation resident in Canada) is a shareholder of
a particular corporation (or is connected to that shareholder) and received a loan from the
particular corporation, or any corporation related to it, the amount of indebtedness is included in
income.
15(2.1) A person is connected if they do not deal at arm’s length with the shareholder.
*Related Parties are deemed not to deal at arm’s length, otherwise it is a question of fact.
EXCEPTIONS. 15(2) does not apply
15(2.2) between non-resident persons
15(2.3) in the course of a crediting business on reasonable terms.
15(2.4)
(a) in respect of specified employees (s.248: a 10% or more shareholder, or individual who does not deal at
arm’s length with the company.
(b) loan to an employee to buy a house to live in.
(c) loan to subscribe for shares of the company
Test for the above provision is that they must have got the loan by virtue of their employment, not
shareholdings (i.e. are other employees treated the same way. There also must be credible arrangement to
repay within a reasonable time.
15(2.6) where there is repayment within one year.
s.20(1)(j)
If the loan is caught (included in income), the shareholder can deduct repayment from income when
the loan is eventually repaid.
s. 80.4(2)
Interest on Debt. Same scope as 15(2). Where the actual interest rate on the loan is less than the
prescribed rate, the prescribed rate will be applied to the shareholder’s income.
EXCEPTIONS.
s.80.4(3)(a) Does not apply in the ordinary course of lending money (the loan is not made by reason of
employment or shareholding) and the interest rate is an arm’s length rate.
Dividend In Kind
Where the company can declare a dividend in the form of property. This is captured in the s.248 definition
of dividend (any dividend other than a dividend out of the capital account).
CHAPTER 7 – SPECIFIC DEALINGS IN SHARE CAPITAL
AND THE DEEMED DIVIDEND
Share Re-Purchase: Deemed Dividends
s.84(3) Where a corporation resident in Canada has redeemed, acquired or cancelled, in any manner whatever any
of the shares of any class of its capital stock,
(a) the corporation shall be deemed to have paid a dividend on the redeemed shares equal to the amount
by which the amount paid by the corporation exceeds the PUC of the original shares immediately before
that time.
s.89(1) paid-up capital (b) in respect of a class of shares (ii) after 1977, computed w/out reference to
the act (with specific exceptions). No direct authority to the meaning of “without reference to the
act”. BUT CBCA holds;
Par value OR
Consideration received by the company for the original issuance (otherwise known as
corporate share capital). Lesser amount for non-arms-length transactions.
*Note that PUC attaches to shares, not any particular shareholder.
s.54 proceeds of disposition includes any (a) sale price etc. Does not include (j) any amount deemed by 84(3)
to be a dividend. **The exclusion here is designed to avoid double taxation on dividend income and capital
gain.
Share Re-Purchase: Capital Gains
s.40(1)(a)
general rules. Except as otherwise expressly provided in this part, a taxpayer’s gain for the taxation
year from the disposition is the amount by which (a)(i) the proceeds of disposition exceed the total
of the adjusted cost base.
s.54 adjusted cost base
(a) depreciable property: the capital cost to the taxpayer of the property as of that
time.
(b) in any other case: the cost to the taxpayer adjusted according to s.53.
s.54 proceeds of disposition is the sale price, but does not include (j) any amount deemed by
s.84(3) to be a dividend.
Winding up the Company: Deemed Dividends
s.84(2) Winding up the company. Deemed dividend in the amount of proceeds less the reduction in PUC. *Same
capital gain calculation as for a share re-purchase in s.84(3).
Reduction of Share Capital
s.84(4) Reduction of corporate share capital. Deemed dividend in the amount paid minus the reduction in share
capital.
s.53(2)(a)(ii) In computing the ACB for a taxpayer, the following amounts shall be deducted. Any amount
received by the taxpayer that is a reduction of the PUC, except to the extent that the amount is deemed by
subsection 84(4) to be a dividend received by the taxpayer.
s.40(3) Where the total deductions under s.53(2) exceed the current ACB, the amount of the excess shall be
deemed a gain.
Deemed Dividend: IF(Payout>PUC, Payout – PUC,0)
New ACB: IF(ACB – (Payout – Deemed Dividend)<0,0, ACB – (Payout – Deemed Dividend))
*If ACB is negative, then there is a deemed gain under s.40(3).
Reduction of Share Capital: Public Companies
s.84(4.1) Unless the redemption/acquisition/cancellation falls under (2: winding up) or (s.86: reorganization), any
reduction of PUC is deemed to be a dividend.
Addition to Share Capital
s.84(1) Deemed dividend on additions to share capital (ex. retained earnings). Where a corporation has increased
PUC otherwise than by
(b) a transaction where the value of assets increase by the same amount
(c) a transaction where the value increase in one class of shares is offset by a decrease in another
(c.3) conversion of a contributed surplus into share capital (for par value shares).
(a) payment of a stock dividend
s.248(1) stock dividend includes any dividend paid by a corporation to the extent that it is paid by
the issuance of shares of any class of the capital stock of the corporation.
s.82 taxpayer income shall include the “amount of a dividend”
s.248(1) “amount” (c) of a stock dividend is the amount by which the PUC of the corporation
increased as a result of the dividend.
The corporation shall be deemed to have paid a dividend equal to the amount by which the increase in the PUC
exceeds (i) the net value of the company (ii) the value differential between share classes (iii) the increase in PUC
resulting from a conversion of contributed surplus.
This dividend is deemed received in proportion by all shareholders of that class.
s.53(1)(b) the ACB of the shares increase by the dividend amount defined in s.84(1). This is done to avoid
double taxation on deemed dividend income and capital gains.
s.15(1) shareholder benefits excludes share-buybacks, reduction of capital, winding-up, stock dividends,
contributed surpluses. This is because all these elements are already taxed by s.84.
Additional Public Company Rules
s.84(6)(b)
Subsection (3) – share repurchase – is not applicable where the company buys its shares in the open
market in a manner consisted with a normal purchaser. *In this situation, the shareholder would
have a capital gain and not a deemed dividend.
s.183.1(2)(a)
Where a corporation pays an amount to a person it is not dealing with at arms-length as proceeds of
disposition on a share and (b) the amount may reasonably be considered as a substitute for a
dividend, the company must pay 45% tax on the amount.
*Applying this section is a question of fact.
Note that the tax rate on the dividend is 31.58%.
CHAPTER 8: Share for Share Mergers
Simple Rollover
s.85.1(1)
Where the purchaser issues shares to the vendor in exchange for the vendor’s shares:
(a) the vendor shall be deemed to (i) have disposed of the old shares at their ACB (ii) to have
acquired the new shares equal to the ACB of the old shares.
(b) the cost to the purchaser of each exchanged share is the lesser of (i) fair market value
and (ii) PUC right before the exchange.
*If this section does not apply, the purchaser’s cost is equal to the increase in share
capital.
s.85.1(2)
Subsection (1) does not apply where:
(a) they parties were not dealing at arm’s length (limited application to private companies)
(b) vendor or non-arms length party
(i) controlled the purchaser
(ii) after transaction owns >50% of the FMV (Reverse Takeover)
(c) joint election under s.85(1) or (2)
(d) consideration other than shares (cash) was provided by the purchaser.
*Note administrative allowance for cash for fractional shares and the practice of
parceling up the purchase.
s.85.1(2.1)(a) Where (1) applies
(a) PUC of the new shares shall be reduced according to (A-B)
A = The increase of PUC of all the shares of the purchasing corporation.
B = The tax PUC of the acquired shares.
*Opening PUC is the buyer’s share capital addition.
(b) PUC shall be increased by the lesser of deemed dividends under s.84(3)
s.85.1(2.1)(b) There shall be added an amount equal to the lesser of:
(i) the lesser of deemed dividends and the PUC grind under (a).
*If the exchange results in a deemed dividend, it will add to the PUC of the share.
Chapter 9: Section 85 Transfers
Can use s.85 to accomplish an estate freeze or to move assets into a newly incorporated company.
s.85(1) Transfer of eligible property to taxable Canadian corporation for consideration that includes capital stock of
the corporation by filing a joint election in the prescribed form.
(a) The proceeds for the taxpayer and the cost for the corporation is equals the agreed amount
*NOTE: Always take non-share consideration at the elected amount b/c it comes out tax-free.
Restrictions on the Agreed Amount
(b) FMV of non-share consideration = general lower bound. Subject to (c). Otherwise, election deemed to
be at FMV.
(c) FMV of disposed property = general upper bound. Otherwise, election deemed to be at FMV.
s.69(1) Inadequate Consideration. Where a taxpayer has acquired something from a non-arms length party at an
amount in excess of the FMV, the taxpayer shall be deemed to have acquired it at the FMV.
(c.1) Inventory or Capital Property. The agreed amount must be greater than or equal to the least of:
(i) the FMV
(ii) the cost (ACB) to the seller of the property at the time of the disposition
(d) Eligible Capital Property. The agreed amount must be greater than or equal to the least of:
(i) 4/3 of the cumulative eligible capital account (s.14) – UCC equivalent
(ii) the cost (ACB) to the taxpayer of the property at the time of the disposition
(iii) the FMV
(e) Depreciable Property. The agreed amount must be greater than or equal to the least of:
(i) the UCC to the taxpayer of all the property of that class immediately before the disposition.
(ii) the cost (ACB) to the taxpayer of the property at the time of the disposition
(iii) the FMV
s.85(5) Rules on transfers of depreciable property. Where (1) has applied to a disposition of
depreciable property and the capital cost to the transferor exceeds proceeds of disposition
[deemed under s.85(1)(a)]
(a) the capital cost to the transferee (buyer) is deemed to be the amount that was
its capital cost to the transferor (seller).
(b) the excess is deemed to have been deducted by the transferee (buyer) under
paragraph 20(1)(a) in computing taxable income.
**In essence, this rule simply deems that the CCA carries over the CCA taken by the
taxpayer to the company.
s.13(1) Recaptured depreciation. The excess of depreciation over ACB should be included in
the taxpayer’s income. *Negative UCC is included in income.
s.21 undepreciated capital cost. Basically defined as the ACB (A) less the total
depreciation (E).
s.20 Capital cost of property.
(e.1) where two or more properties described in (e) are disposed of at the same time, they shall be deemed
to have been disposed of in the order chosen by the taxpayer for the application of (e). Technical rules that
takes into account that the class UCC will change as assets are disposed of. **DC says this is a rule of nonapplication, exchanged properties are aggregated for the purpose of applying (e).
Related Party + Benefit Restriction on the Agreed Amount
(e.2) where the FMV of the property exceeds the greater of
(i) the FMV after the exchange of the consideration received by the taxpayer
(ii) the elected amount
and it is reasonable to regard the excess as a desired benefit conferred to the taxpayer, the agreed
amount shall be deemed to be equal to the elected amount plus the excess (does not apply to the
cost allocation calculation in (f) – (h)).
*Can use a price adjustment clause to avoid a deemed benefit. Condition that there must be a
genuine attempt to value the company.
Calculating the Vendor’s ACB
(f) the cost of non-share consideration received is the FMV of that consideration
(g) the cost to the taxpayer of preferred shares is deemed to be the proceeds of disposition less non-share
consideration.
(h) the cost to the taxpayer of common shares is deemed to be the proceeds of disposition less non-share
consideration and preferred share consideration.
Defining Eligible Property
s.85(1.1) Eligible Property
(a) capital property (excludes real property or an interest therein)
s.54 capital property means (a) any depreciable property of the taxpayer and (b) any property (other
than depreciable property) whose disposition would result in a capital gain or loss.
(e) an eligible capital property (includes intangible non-depreciable assets, ex. goodwill)
(h) capital property that is real property or an interest in real property used by a business carried on in
Canada.
(f) Inventory, as long as it isn’t real estate.
PUC of Share Consideration Issued by the Company
s.85(2.1)(a) Computing PUC – The Grind
(A - B)(C/A)
A: The increase in the PUC of the Class as a result of the share issue (i.e. the FMV of the shares issued)
B: The cost of the property acquired (elected amount) less non-share consideration paid
C/A: apportionment rule between preference and common shares. Allocated based on the value increase that is
attributed to each class.
CHAPTER 10: Section 86 & 51 Share Exchanges
Section 86 Share Exchanges
Can be used to convert the value of the company into cash and/or frozen preferred shares. Does not apply if
property has been transferred under s.85(1). The difference between a s.86 and a s.85 is that in a share for
share transfer, the s.85 transfer crystallizes a capital gain, the s.86 acts as a rollover.
s.86(1) Exchange of shares in a reorganization of capital.
Re-organization of capital
Disposition shares of a class
Property received includes shares of the same corporation
s.86(1) does not apply where there has been an election under s.85(1)
(a) The cost to the taxpayer of non-share consideration receivable from the corporation is its FMV
(b) The cost to the taxpayer of any new shares of the corporation is the ACB of the old shares less non-share
consideration.
(c) The proceeds to the taxpayer are deemed to be the total cost of the new shares, determined in (b) plus nonshare consideration.
s.54(1)(k) Proceeds of disposition does not include any amount that would be deemed to be a dividend
under s.84(3).
*Note that these rules are engaged automatically, no election is required.
s.86(2.1)
PUC Grind
(a) Reduce Share Capital by (A-B)
A = Increase in share capital
B = Old Share PUC minus non-share consideration (if negative = 0)
Deemed Dividend
s.84(3)
Where a corporation resident in Canada has redeemed, acquired or cancelled, in any manner
whatever any of the shares of any class of its capital stock,
(a) the corporation shall be deemed to have paid a dividend on the redeemed shares equal
to the amount by which the amount paid by the corporation exceeds the PUC of the original
shares immediately before that time.
s.84(5) Amount Paid = 86(2.1) Tax PUC + non-share consideration.
*Unless there is non-share consideration involved, there will be no deemed
dividend.
Section 51 Rollover
Are used when neither ss. 85 or 86 applies. Is a less complicated way to roll-over shares where there is no
reorganization of capital (both classes of exchanged shares already exist), holder does not have to exchange all
of the class of shares.
s.51(1) Convertible Property
A share is exchanged for another share of that corporation
No consideration is received other than the share
(c) deemed no disposition (does not engage capital gains calculation)
(d) the cost of the new shares received is the ACB of the shares given up
s.51(3)
PUC Grind
(a) Reduce Share Capital by (A-B)
A = Increase in share capital
B = The PUC of the old shares
CHAPTER 11: Amalgamation
s.87(1)
Amalgamation. Where two taxable Canadian corporations (predecessor corporations) merge to
form one corporate entity such that:
(a) all the property of the predecessor corporations is consolidated
(b) all the liabilities are consolidated
(c) all the shareholders who owned shares of the predecessor corporation receive shares of
the new corporation.
otherwise than as a result of acquisition of property pursuant to purchase or distribution on winding
up.
*Note that the shorter taxation year for predecessor corporations creates a potential trap in
bringing non-capital losses forward.
Costs and Proceeds to Predecessors and Amalgamated Company
s.87(2)
Where there has been an amalgamation, the following rules apply:
(a) the amalgamated entity shall be deemed to be a new corporation with a fiscal year
starting on the date of amalgamation, predecessor corps. end tax years on that date.
Flow Through to Amalgamated Corp.
(b) Inventory Cost = Predecessor consolidation
(d)(i) Capital Cost (depreciable property) = Predecessor consolidation
(d)(ii) UCC = Predecessor consolidation
(d.1) Pre 1972 Asset Cost = Actual cost to predecessor (not V-Day)
(e) Capital Property (other than depreciable property) ACB = Predecessor consolidation
(f) Eligible Capital Amounts = Deemed continuation of old companies.
(z.1) the amalgamated company is deemed to be a continuation of its predecessors.
(aa) add the RDTOH accounts of the predecessor companies to the new company.
(vv) Add the total of all GRIP amounts calculated in s.89(5).
*Flag any non-capital losses and refer to Chapter 15.
*These rules do not result in a disposition, they are a direct transfer into the amalgamated
company.
Costs and Proceeds to Predecessor Shareholders
s.87(4) Shareholders of the predecessor corporation who only receive consideration in the form of the
amalgamated company shares shall be deemed to have:
(a) disposed of those shares at a cost equal to ACB  no capital gain.
(b) acquired new shares at a cost equal to the proceeds
except where the fair market value of the old shares exceeds the value of the new shares and it is reasonable to
believe that the transferor desired to confer a benefit on a related person. Then the following rules apply:
(c) deemed disposition is the lesser of ACB and FMV.
(d) capital loss is deemed to be nil.
(e) cost to the taxpayer is deemed to be equal to proceeds in (c).
s.87(3) Grind Amalgamated Company PUC
(a) PUC must be deducted by the amount (A – B)
A = Opening PUC of the Amalgamated Company
B = Total PUC from predecessors
*Flag the possibility of a PUC shift between the predecessor shareholders. This can be avoided by using
different classes of shares.
CHAPTER 12: LIQUIDATIONS
s.88(1)
Winding Up Subsidiary. Where a parent owns at least 90% of their subsidiary and shares not owned
by the parent are owned by an arm’s length party. *NOTE CHANGE OF CONTROL RQMTS.
(a) Asset Proceeds to Subsidiary. Each property is deemed to have been disposed of at an
amount equal to the cost amount to the subsidiary.
*Point is that there is not gain or loss to the subsidiary on the transfer.
(b) Share Proceeds to Parent. Shares are disposed of for an amount equal to the greater of:
(i) the lesser of the tax PUC of the shares and the cost amounts of the property
(ii) the ACB of the shares
s.248(1) Cost Amount.
Depreciable Property = UCC of the class
Capital Property = ACB
Inventory = cost
Eligible Capital Property = 4/3 of the cumulative eligible capital amount.
(c) Tax Cost to Parent. The cost to the parent is deemed to be the proceeds to the
subsidiary calculated in (a).
(d) Bump. The tax cost on capital property (other than ineligible property) can be bumped
by the amount by: A – (B + C)
A = The ACB of the shares, refer to (b)(ii)
B = Total Tax Cost of Property less debts
C = Dividend previously paid to the parent
(ii) You cannot bump the ACB beyond Fair Market Value to incur a capital loss
88(1)(c) Ineligible Property = depreciable property.
*Policy reason for the bump is to allocate the ACB on acquired shares to the underlying
property.
(d.1) Deemed dividend rules in s.84(2) do not apply.
(e.2) CDA, RDTOH, and GRIP flow through to the parent company. Refer to parallel
amalgamation rules.
s.88(2)
Winding Up. Where all or substantially all of the property owned by the corporation is distributed to
shareholders. *NOTE CHANGE OF CONTROL RQMTS.
s.69(5) Where corporate property has been appropriated to a shareholder on a winding up:
(a) the corporation is deemed to have disposed of the property immediately before the
winding up at its fair market value.
(b) the shareholder is deemed to have acquired the property at its fair market value.
s.84(2) Winding up the company. Deemed dividend in the amount of proceeds less the reduction in
PUC. However, the capital dividend account of the company can be used to offset this deemed
dividend.
s.87(1.1) Deemed Merger. Vertical amalgamations which would otherwise be liquidations because no new shares
are issued.
CHAPTER 13: QSBC Capital Gain Exemption
s.110.6(2.1)
An individual who was resident in Canada throughout the year and disposed of a share of a qualified
small business corporation, the individual may make a deduction not exceeding the amount
determined in (2)(a).
s.110.2(2) Capital Gains Deduction. 375k deduction (point is that 750k of capital gains is
exempt)
s.110.6(1)
qualified small business corporation share
(a) share of a small business corporation owned by the individual (or the individual’s spouse,
common law partner, or a partnership related to the individual).
s.248 small business corporation. A CCPC where all or substantially all (90%) of the
FMV of the assets are attributable to:
(a) an active business carried on primarily (50%) in Canada or by a company
related to it.
(b) shares or debt of a small business corporation connected with it.
(c) a combination of (a) and (b).
(b) throughout the 24 months preceding the determination time, was not owned by anyone
other than the individual, or a person or partnership related to the individual.
s.110.6(14)(f) Shares issued to a person or partnership are deemed to have been
owned immediately prior to their issue by an unrelated part unless
(i) they were consideration for other shares: refer below to (e)
(ii) they were consideration for all or substantially all of the assets in an
active business or a partnership interest.
(iii) as payment of a stock dividend.
(c) in the 24 months preceding the determination time, 50% of the FMV of the assets in the
CCPC were:
(i) used in an active business by it or a related party
(ii) shares or debt of a CCPC connected to the company used 50% of their assets in
an active business. *An important implication of this rule is the potential for dilution
(refer to example on P.277).
(d) Anti-Dilution. where, for any period of time in the preceding 24 months, all or
substantially all of the FMV of the assets of the corporation and its connections are not
qualifying assets, the 50% reference in c(ii)(B) changes to all or substantially all in respect of
each other corporation connected to the corporation.
(e) if at any time in the preceding 24 months the share was substituted for another share,
the share shall be considered to have met the requirements of this definition only if the
other share
(i) was not owned by any person other than as described by (b) in the last 24
months.
s.110.6(14)
(a) taxpayer is deemed to dispose of shares in the order that they were acquired (determines which
shares are sold by shareholders who acquired shares at different points before the sale).
(b) Designed to maintain a CCPC’s status if a large public corporation has rights under a purchase
and sale agreement for shares.
Practice Note: Excess Cash (Purification to meet the 90% rule)
May be considered an active business asset where its removal would destabilize the business (recall example of a
cyclical business that must keep cash on hand)
A company can get rid of excess cash by paying a dividend out of the capital dividend account, paying of shareholder
loans, or declaring a dividend.
Hudon: The question of whether a company carries on an active business is a question of law and fact. Applies a very
wide definition to the conduct of business to include and “undertaking of any kind whatsoever”. Even though the
company did not actually reach an agreement to start work, the effort involved in working towards that agreement
counted as carrying on business.
CHAPTER 14: Individual Share Gains Deemed to be
Dividends (Dividend Strip)
s.84.1(1) Non-arm’s length sale of shares.
Taxpayer resident in Canada (other than a corporation), disposes of shares that are capital property (subject shares),
of a corporation resident in Canada (subject corporation), to another corporation (purchaser corporation) that does
not deal at arm’s length, and after the disposition the subject corporation would be connected.
s.186(4) A corporation is connected to the payer corporation if
(a) the payer corporation is controlled by the particular corporation. Exception
where control is deemed by s.251(5)(b): right to acquire shares is deemed to have
been exercised. OR
s.186(2) A corporation is controlled by another if more than 50% of its share
capital (w/ full voting rights) belongs to the other corporation or non-arms
length shareholders of the other corporation.
s.251(1)(a) Related persons shall be deemed not to deal at arm’s length (see
chapter 3)
(c) Where (b) does not apply, it is a question of fact whether persons not
related to each other are dealing with each other at arm’s length.
(b) if the particular corporation owns more than 10% of the voting shares in the
payer corporation and have a fair market value of more than 10% of the capital
stock of the payer corporation.
*Refer to the McLarty case for arm’s length transaction test.
s.84.1(2)(b) Deemed to be an arm’s length transaction where
(i) before the transaction the taxpayer was in a group of < 6 people who controlled
the company
(ii) after the transaction the taxpayer is in a group of < 6 people who control the
company, each of whom was a member of the first group.
(a) where shares (new shares) of the purchaser corporation have been issued as consideration for the
subject shares, reduce PUC by the amount (A-B)
A = increase in the capital stock of the purchaser corporation as a result of issuing the new shares.
B = max(Subject Share PUC, Subject Share ACB) – FMV(non-share consideration)
(b) a dividend is deemed paid to the taxpayer by the purchaser corporation equal to (A+D) – (E+F)
A = increase in PUC of the capital stock of the purchaser corporation.
D = FMV of the non-share consideration received from the purchaser corporation.
E = max(Subject Share PUC, ACB)
F = PUC Grind computed in (a).
*If there is a deemed dividend, it is not included in the proceeds of disposition to compute the
capital gain of the subject company. Refer to s.54 Proceeds of Disposition (k)
ACB Adjustment for the Subject Share ACB
s.84.1(2) adjusted cost base calculation
(a.1) where a share is acquired by a taxpayer after 1971 from a person whom the taxpayer was not dealing
with at arm’s length or was an exchanged share, capital gains realized after 1984 by a related party are
deducted from ACB)
CHAPTER 15: Acquisition of Control Rules and
Use of Corporate Losses
s.111(1) Corporations may deduct from their income
(a) non-capital losses for the 20 preceding years and the three taxation years following the year
(b) net capital losses for any preceding years and three years following the year
*Important to note that control in this context refers to legal control (50% plus 1 to elect BoD).
Has there been an acquisition of control?
s.256(6)
Control deemed not to exist where a creditor exercises acquires control for the purpose of securing
a loan.  Note anti-avoidance rule below, s.256(8).
s.256(7)
Acquiring Control. Application to sections 111 (losses deductible), 294(4) (deemed year-end),
88(1.1) (non-capital losses of a subsidiary), and 88(1.2) (net capital losses of a subsidiary).
(a) Control of a corporation shall NOT be deemed acquired on an acquisition/redemption of
shares
(A) where a person acquires the shares from a related party, unless that person
exercised a right referred to in s.251(5)(b).
(B) where a person is related to the corporation immediately before that time.
(C) on acquisition by executors or administrators
(b) Where at any time 2 or more corporations have amalgamated:
(i) control of the corporation is deemed not to have been acquired solely because of
amalgamation unless control is deemed to have been acquires by (ii) or (iii).
(ii) a person or group that controls the amalgamated corporation is deemed to have
acquired control of the predecessor corporation (and all of the corporations it
controlled) unless
the amalgamated controller would fall under an exemption rule in (a) if they
acquired all the shares of the predecessor corporation.
(iii) control of a predecessor corporation and its controlled subsidiaries is deemed to
have been acquired by a (hypothetical) person or group unless
(A) the predecessor corporations were related, otherwise than by
s.251(5)(b)
(B) if one person could acquire all the shares of the amalgamated
corporation that were distributed in consideration for one of the
predecessors and achieve control of the amalgamated corporation.
(C) where (iii) would otherwise deem control of every predecessor to have
been acquired.
*Generally, this section applies to widely held companies.
(c) Subject to (a), where two or more persons (transferors) dispose of shares in Corp A in
exchange for Corp B (acquiring corporation), control of Corp A is deemed to have been
acquired unless:
(i) Corp A and Corp B were related
(ii) if all the shares of Corp B were acquired by 1 person, that person would fall
under one of the exemptions in (a).
*Deals with reverse takeovers of public companies that would not otherwise be caught
because no ‘group’ acquires control of the loss company in a share exchange.
s.251(5)(b)
A right in equity or contract to acquire shares or cause a redemption/reduction in the corporate
share capital.
s.256(8)
Anti-avoidance Rule. Where a taxpayer acquires a right described in s.251(5)(b) for the purpose of
avoiding the loss limitation rules, the taxpayer is deemed to be in the same position as if they had
exercised those rights.
Impact on the Companies
s.249(4)
Where there is a change of control (a) the corporation’s year end is deemed to have occurred and
(b) the new taxation year begins unless (c) the change of control is within 7 days of the year end and
the parties make an election to delay.
Capital Losses
s.111(4) Where control of a corporation has been acquired by a person or group of persons,
(a) No amount in respect of a net capital loss for a taxation year ending before or (b) after that time is
deductible.
(c) In computing the ACB to acquiring corporation of non-depreciable property, deduct the amount by which
the ACB exceeds the FMV.
(d) Each amount deducted by (c) is deemed to be a capital loss immediately before the disposition.
(e) The capital loss determined above may be offset by electing a disposition value in respect of capital
property (including depreciable property) that has appreciated in value, thereby creating a capital gain. The
election must be in between ACB and FMV. The property is deemed to be reacquired at that election.
Non-Capital Losses
s.111(5) Where there has been a change of control, no non-capital losses may be carried forward or back except
where
(a) the non-capital losses may reasonably be regarded as its loss from carrying on a business (not from
property) and that (i) the business was carried on with a reasonable expectation of profit.
(b) the losses are only deductible against business profits from an enterprise undertaken with a reasonable
expectation of profit.
Depreciable Property
s.111(5.1) Where UCC exceeds FMV, the excess capital cost is deemed to be claimed as CCA in the predecessor
company before the acquisition of control.
Effect on GRIP/LRIP
A corporation that becomes a CCPC will have an addition to its GRIP (income not subject to SBD), CCPC = GRIP
A corporation that ceases to become a CCPC will have an addition to its LRIP account
*Note that this change in control may occur pursuant to a right to acquire shares under s.251(5)(b), although the
change in control has not yet occurred.
Amalgamations & Windups
s.87(2.1)
Deems that although a new corporation is created in an amalgamation, the rules for loss carry over
still apply.
s.88(1.1)/(1.2) Where a subsidiary is wound up under s.88(1), non-capital and net-capital losses are allowed to flow
through on the following conditions:
(1) the losses must not have been deducted by the subsidiary.
(2) the losses must have otherwise been deductible by the subsidiary.
CHAPTER 16: Section 55 Inter-Corporate Dividends
Deemed to be Gains
Can use this transaction to restructure a family corporate group. Dads owns a holding company that has ½ of the
shares in an operating company. Daughter owns the other half of the operating company. Can have the
operating company repurchase the shares in Dad’s holding company. This will cause a deemed dividend that
passes to the holding company tax-free.
Re-Structure of Internal Corporate Group (see opposite).
s.55(2)
Deemed proceeds or capital gain. A distribution where:
the corporation received a taxable dividend that is deductible under s.112 and
a purpose of the distribution/deemed dividend under s.84 (share buyback) was to reduce the capital
gain on the share and
the dividend is reasonably attributable to anything other than safe income,
excluding the portion subject to Part IV tax, it
(a) shall not be deemed to a dividend
(b)/(c) shall be deemed to be a disposition for proceeds or a pure capital gain.
s.55(2) Safe Income Exception
“Dividend reasonably considered to be attributable to anything other than safe income”
*Most inter-corporate transactions will fall within this exception. Asset appreciation is not safe income.
s.55(3)(a) Application. Subsection (2) applies if there was
(ii) a significant increase (other than by a disposition for fair market value) in the direct interest of an unrelated
party or
(iii) a disposition to an unrelated party of
(A) shares of the capital stock of a corporation that paid the dividend
(B) property of which more than 10% of the FMV of which was derived from the stock of the dividend payer.
s.55(5)(e)(i)
Siblings deemed unrelated for this section only.
s.55(5)(f)
Separate Dividends. You may designate separate dividends to carve up the amount of safe income
claimed.
s.55(4)
GAAR. Where one of the main purposes of becoming related was to avoid (2), the parties shall be
deemed not to be related.
Stop Loss Rule on a Share Buyback
112(3) A corporation that claims a capital loss must write that loss down by (i) dividends received and deducted
under s.112 and (ii) dividends paid out of the capital account.
When an operating company buys back the share of a holding company it creates a deemed dividend that is
deducted from proceeds. Proceeds cannot be reduced below ACB to create a capital loss.
Exception to this rule if the taxpayer (1) did not own more than 5% of any class of shares or (2) owned the shares
for more than 1 year prior to the sale.
729658 Alberta: Safe income should be pro-rated between all the shares of the company. Court ruled that this was
not the case and that safe income could be applied to any shares.
VIH Logging: Safe income can be paid through a dividend to an entirely new ‘paper’ company and then taken out as
safe income.