When subsection 55(2) applies, the inter-corporate dividend is converted to proceeds of disposition, resulting in a taxable capital gain. Under the old rule, certain way of inter-corporate transactions can create a tax free inter-corporate dividend even though the capital gain should be recognized if the transaction is done in a more direct way.
In Budget 2015, federal government proposed an amendment subsection 55(2) so such inter-corporate transactions cannot be converted into tax-free dividends. Such amendment is carried forward to Budget 2016 and confirmed its implementation.
There are five main changes to the rules:
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Note: All information relating to s.55(2) above is available from Government of Canada website.
By Theresa Lo, CPA, CGA
October 11, 2017
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