Get Audit-Ready!
Canadian groups that pay intercorporate dividends should be prepared to respond to possible inquiries from the CRA. As part of its ongoing audit activities, the CRA is requesting information regarding intercorporate dividends, including safe income calculations, adjusted cast base and paid-up capital schedules, and the purpose of each dividend paid among other information.
KPMG has a national Corporate Reorganziations team that can help corporate groups navigate the complex rules that can apply to intercorporate dividends and prepare for possible CRA queries.
Background
The Department of Finance introduced significant amendments to the rules in section 55 of the Income Tax Act as part the 2015 federal budget, applicable to intercorporate dividends received after April 20, 2015. Specifically, Finance expanded the rules that can recharacterize certain otherwise tax-deductible intercorporate dividends as capital gains or, in the case of a share redemption, additional proceeds of disposition, potentially resulting in additional tax. These changes include new purpose tests and a narrowing of the exception for transactions between related parties. In recent years, the CRA has published revised and new administrative positions regarding the calculation and allocation of safe income and adjusted cost base, including in a lengthy position paper on various aspects of the application of section 55. Those CRA administrative positions have not yet been tested in the courts. Corporate taxpayers continue to face uncertainty regarding the amended rules in section 55 and the CRA’s related administrative positions.
Purpose Tests
A tax-deductible intercorporate dividend may be recharacterized as a capital gain under the rules in section 55 where the dividend exceeds the safe income attributable to the shares on which the dividend is paid and one of the purposes of the dividend is to effect any of:
- A significant reduction in a capital gain that, but for the dividend, could have been
realized on a disposition of any share - A significant reduction in the fair market value of any share, or
- A significant increase in the cost of property of the dividend recipient.
- A significant reduction in a capital gain that, but for the dividend, could have been
The payment of a non—safe income dividend only needs to have one of these purposes (even if it is not the main purpose) to be recharacterized under section 55.
For questions and concerns, please reach out to Chris Bodnar.