A corporate payor doesn’t get a refund if it pays a dividend but fails to file its tax return for the year within three years. But at least RDTOH isn’t reduced either. See Dino Infanti, “FCA Agrees: Dividend Refund Timed Out and RDTOH Remains Intact” Tax for the Owner-Manager 16:1 (January 2016), commenting on 1057513 Ontario Inc. v R, 2015 FCA 207.
The reorganization started off in the usual manner with a s. 86 reorg under which the DC shareholders exchanged their old common and preferred shares for special “butterfly” shares and new common shares. The new common shares’ attributes were accepted as being different from those of the old shares on the basis of a more restricted right to receive stock dividends and on the basis of a right of the holders to receive quarterly financial statements. (This may have resulted from CRA prodding, as there is an inserted paragraph number for this.)
DC was a corporation under the CBCA. The foregoing is interesting because it shows that the CRA is holding fast to its view that classes of shares must be distinguished by their rights and because it shows the kinds of differences in rights that the CRA might be willing to accept for the purposes of making such a distinction.
Will a shareholder agreement that permits a minority shareholder to elect the majority of the corporation’s board confer control on the minority shareholder? The Tax Court in Kruger Wayagamack Inc. v R, 2015 TCC 90, said not if the minority shareholder, despite its control of the board, does not have “effective control”:
The TCC reasoned that “effective control” (as described in Duha [1998 CanLII 827 (SCC)]) of a corporation can be diminished if, pursuant to a USA, decisions are required to be unanimous. For instance, even if one shareholder has a majority of the voting shares and elects the majority of the directors, if he or she does not have the ability to exert a “dominant influence” over the management, direction, or orientation of the future of the corporation, that shareholder does not have “effective control” of the corporation. Essentially, Kruger [the minority shareholder with control of the board] was found not to have control because it did not have the ability to make strategic decisions that would change the direction of the company; such decisions required the unanimous agreement of the directors or shareholders. The court did not inquire into the actual operations of the company; instead, it relied on the content of the shareholders’ agreement.
—Jennifer Leve and Nathan Wright, “De Jure Control May Require ‘Dominant Influence'”, Canadian Tax Focus 5:3 (August 2015)
KPMG reports that the implementation of a proposal to require corporations to treat typical freeze shares as debt (with an offsetting special debit to equity) for financial statement purposes has been postponed to January 1, 2018 (from January 1, 2016).
Opco pays a dividend in year One, but it doesn’t believe it has any GRIP at that time, and so no eligible dividend designation is made in respect of the dividend. The CRA later reassesses Opco, and one of the effects of the reassessment is to give Opco GRIP in year One. Opco contests the reassessment, but it is upheld, and more than three years have passed. Can Opco late-file an eligible dividend designation for the year One dividend now that Opco had GRIP at the time? The CRA has stated that Opco cannot late-file a designation outside the limitation period established by subsection 89(14.1). Moreover, the CRA will not accept a designation within the limitation period and hold it in abeyance pending the outcome of a dispute. Technical interpretation 2014-0541991E5 dated March 12, 2015, summarized in Daniel Gosselin, “Late-Filed Eligible Dividend Designations Subject to Strict Three-Year Window” (July 2015) 15:1 Tax for the Owner-Manager 4-5.
Finance is proposing to amend 55(2) and related provisions for dividends paid after April 20, 2015.
- 55(2) will contain two new purpose tests. A dividend (other than an 84(3) dividend) might be caught under the new rules if one of the purposes of the dividend is to effect (a) a significant reduction in the FMV of any share or (b) a significant increase in the total cost of properties of the recipient.
- The related-party exception in 55(3)(a) will apply only to 84(3) dividends.
- The amount of a stock dividend for the purposes of 55(2) will be equal to the greater of the PUC of the shares issued on the stock dividend and their FMV. (But the same effect might be achieved under a section 86 share reorganization, for example.)
- 55(2) could apply in respect of a share that has a FMV equal to or less than the ACB of the share.
- The Part IV tax exception will apply only if the dividend recipient does not receive a refund of the Part IV tax.
Summary of KPMG TaxNewsFlash 2015-23 dated May 27, 2015.
Some additional points (thanks to Shelley Wickenheiser):
- The changes appear intended to prevent safe income “borrowing” (per the addition of “of the share on which dividend is received” to the end of subparagraph 53(1)(b)(ii) and new paragraph 55(2.1)(c)).
- The deemed gain, if 55(2) applies, will be in respect of a disposition of “a capital property” even if the recipient has disposed of the share (cf new 55(2)(b) and old 55(2)(b)).
Note added July 13, 2015—See also Kenneth Keung, “Section 55 May Now Apply to Every Intercorporate Dividend” (July 2015) 15:1 Tax for the Owner-Manager 3-4. The author notes that the re-characterization of a dividend as a gain (rather than as proceeds) means that the deemed gain could be greater than it was under the old rules (the new rules require the recognition of a gain equal to the dividend amount less PUC rather than the dividend amount less ACB, as per the old rules). The author also suggests that the safe income safe harbour only applies if the payor shares have an accrued but unrealized gain.
74.4(4) will not apply to save an estate freeze of Opco from the corporate attribution rule where a trust holds shares in Holdco rather than shares in Opco directly. 74.4(4) would also not apply where Opco1 and Opco2 are frozen, the trust holds shares in both corporations but Opco1 holds special shares in the capital of Opco2. See Daniel Gosselin, “Estate Freeze Plan Trips Over Corporate Attribution Rules” Tax for the Owner-Manager 15:2 (April 2015).
What happens when a corporation fails to claim refundable tax in a timely manner? Does the amount not refunded reduce RDTOH anyway (per the CRA)? Not according to the Court in Presidential MSH Corporation v R, 2015 TCC 61. (See also Tawa Developments Inc. v R, 2011 TCC 440.)
Update September 15, 2015—The Tax Court has released yet another decision contradicting the CRA position on this subject. See Nanica Holdings Limited v R, 2015 TCC 85.
Update January 27, 2016—The CRA, at the 2015 CTF Conference, stated that it will now follow the findings of the tax courts in the cases above.
According to CRA technical interpretation 2015-0565741E5, subsection 256(6) will not save the CCPC status of a corporation whose shares are pledged to secure an indemnity. The CRA concluded that an indemnity is not a debt for the purposes of the subsection.
The technical interpretation addressed a situation where the corporation’s shares were held by an estate of which a public corporation that was a trust company was the estate trustee. The trust company distributed the corporation’s shares to the estate’s beneficiaries. The beneficiaries agreed to indemnify the trust company for a period of years, which indemnity was secured by a pledge of the distributed shares.
In applying the association rules in subsection 256(1) of the Income Tax Act (Canada), one can ignore shares of a specified class as defined in subsection 256(1.1). The CRA has said the following about that definition.
Regarding the requirements in subsection 256(1.1) relating to dividends:
If, for example, we consider certain preferred shares which are redeemable at $100 per share, being the amount of the consideration for which the shares were issued, at a time when the prescribed rate of interest was 6%, generally, the requirement that the dividend be fixed in amount or rate will be met where the terms or conditions of the shares specify that the annual dividend will be $6.00 per share or 6% of the redemption amount. This requirement will not, however, be satisfied where the terms or conditions of the shares provide that the holders are entitled to dividends at a rate to be determined by the board of directors at the time the dividend is declared provided that the rate of such dividends does not exceed 6% (the prescribed rate at the time that the shares were issued) of their redemption price. [From technical interpretation 9309595 dated July 8, 1993.]
Regarding the requirements relating to the redemption amount of a share and its relationship to the consideration for which the shares is issued:
Our opinion is that where a share has been issued as a stock dividend, the consideration for which the share was issued would be NIL, which is relevant in determining whether the conditions in paragraphs 256(1.1)(c), (d) and (e) of the Act, which refer to “an amount equal to the fair market value of the consideration for which the shares were issued” are met. For example, in paragraph 256(1.1)(e) of the Act, “the amount that any holder of the shares is entitled to receive…cannot exceed the total of an amount equal to the fair market value of the consideration for which the shares were issued and the amount of any unpaid dividends thereon.” Since the redemption amount of a preferred share issued as a stock dividend would be greater than NIL, then the shares issued as a stock dividend do not meet this test and would not constitute shares of a specified class. [From technical interpretation 9605085 dated February 20, 1996.]
The CRA reaffirmed the latter position in IT-64R4 at ¶27.