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.