Under subsection 84(3) of the Income Tax Act (Canada) (the “Act”), 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 at that time a dividend on a separate class of shares comprising the shares so redeemed, acquired or cancelled equal to the amount, if any, by which the amount paid by the corporation [for the shares] exceeds [their] paid-up capital; and
(b) a dividend shall be deemed to have been received at that time by each person who held any of the shares of that separate class at that time equal to that portion of the amount of the excess determined under paragraph (a) that the number of those shares held by the person immediately before that time is of the total number of shares of that separate class that the corporation has redeemed, acquired or cancelled, at that time.
[Emphasis added]
Under subsection 82(1) of the Act, a taxpayer is required to include in income all dividends received in a year.
What happens when a corporation redeems shares but does not pay the redemption amount until, say, the next taxation year of the recipient? Is the dividend received at the time of the redemption, if the corporation merely promises to pay the proceeds later? Does the answer change if the corporation issues a promissory note in satisfaction of the dividend?
The CRA’s long-standing administrative position is that the dividend is paid for the purposes of subsections 84(3) and 82(1) in an amount equal to the value of any type of consideration given by the corporation on the redemption. This consideration can include a mere “undertaking or promise to pay”. See CRA technical interpretation 2005-0145891E5, which cites Cabezuelo v MNR, [1983] C.T.C. 2775 (TCC) and Belair v MNR, [1989] 2 C.T.C. 2186 (TCC).
Contrast the foregoing CRA position with the technical interpretation discussed in this post where the CRA seemed to require something more than a mere promise to pay before it would recognize a dividend as having been paid. See also the post here.
