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Dividend deemed capital gain under 55(2)

We have a client that has received a dividend from a connected corporation. The payer corp does not have any safe income, so for tax purposes it is deemed to be a capital gain. For accounting purposes it is reported as a dividend.

I do not see anywhere on the schedules where we can report it on Schedule 3 and have it transferred to Schedule 6.

Does anyone know how CRA prefers this situation to be reported? I can report it on S3, show it as non-taxable under Section 112, and then add it to S6. Alternatively I can leave it off S3, and only report it on S6. In the latter case, does CRA want the GIFI code changed from dividend to capital gain. Or leave the GIFI code as dividends (to match the F/S) and make an adjustment on the S1?


Without knowing the situation, I would say that even with no safe income, 55(2) generally only applies when the dividend is part of a series of transactions that would be considered to reduce a capital gain (generally in the case if a sale of the shares to a 3rd party). The new rules expand the definition to include a purpose test where one of the purposes of the dividend is to significantly increase the cost base of a share or reduce the FMV of a share. I would say your approach to automatically assume the capital gain treatment is very conservative treatment (again, don’t know all the facts).
If it is a slam dunk that the purpose is to reduce FMV or artificially increase the cost, I would say leave the GIFI as is, as the accounting substance is still a dividend, and ignore schedule 3, add add to schedule 6.

I’m not at all an expert, but no one is on the new 55(2). Blanket treatment of a capital gain with nil safe income however, in my view, is incorrect. Also, it is only the excess of the dividend over the safe income that should be treated as a capital gain. And only if that is appropriate.

Further, the safe income calculation is calculated at the “determination time” which is vague, but there is some case law and interpretation available to assist.


I had to prepare something similar last summer Matthew; but in my case there was some safe income involved. In my instance Opco bought out a corporate shareholder who held 50% of Opco’s voting shares. Subsection 84(3) applied to the share redemption to classify the payment as a deemed dividend. Of the $3M redemption amount, the SIOH attributable to those shares was about $2M, leaving $1M open to 55(2).

Other than having to go back to 1983 to calculate Safe Income on Hand, a deemed Opco year end, and dealing with big city lawyers, there were no real complicating factors (such as RDTOH by either corp or Dividend Refund received by Opco) surrounding the payment itself.

The numbers weren’t quite this round but for illustration purposes;

On its T2 return, Opco recorded the $3M redemption on line 3741 of Schedule 100
If it was a dividend, as in your case, I would have recorded on line 3701.

On its T2 return, Holdco showed $2M as dividend income tax on line 8096 of S125
On its T2 return, Holdco showed $1M as a realized investment gain on line 8211 of S125

On the Schedule 3 of Holdco, $2M was shown as being received from a connected corporation, with all the specifics of the paying corporation. No Part IV tax was payable on the $2M.

On the Schedule 6 of Holdco, $1M was shown as a capital disposition of shares in Part 1.

CDA was calculated on the non taxable portion.

I can’t say whether the reporting was correct, but I am confident the results were correct. What I can tell you is Section 55 is like the wild west anymore with application and administration problems, unintended consequences, and just riddled with problems the CRA either doesn’t know how to handle, or hasn’t given any public guidance on. It’s so bad, even the calculation of Safe Income is subjective.

I believe technically speaking we are not permitted to self-assess the subsection 55(2) capital gain if you look at the case of Ottawa Air Cargo Centre vs the Queen. That involved RDTOH, which changes upon a reclassification of a dividend to capital gains, and ends up causing a bit of a snowball effect.

In any event; to your question, I honestly don’t think CRA has a preferred method of reporting. I think its too complicated for even them to figure out. I think as long as you have the proper results, and can back up your logic if quesioned, the actual mechanics are not as relevant.

For light reading; here are some links to a couple of articles I downloaded a while back that demonstrate the multitude of problems associated with implementing subsection 55(2) as well as CRA’s complete lack of guidance.


Thanks for the input. I am following up with the accountant for the payer corporation to confirm his reasoning for advising the client that the dividend needs to be treated as a capital gain.

Thanks for the input. i appreciate it.

Download this PDF

CBA-CPA Canada Joint Committee on Taxation - Submission … › media › site › operational › tx-taxation › docs

Jan 19, 2018 - The interpretation of the Part IV tax exception in subsection 55 ( 2 ) and compliance issues under … reducing a capital gain [under former subsection 55 ( 2 )], the CRA … total FMV, ACB, PUC and safe income should not change .

Check these links…

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