TEI Comments on Proposed Canadian Legislation Effecting Income Tax Act Section 55

On October 12, 2015, TEI submitted a letter to the Canadian Department of Finance stating that a proposed expansion of the Income Tax Act's subsection 55(2), which is an anti-avoidance provision, would unduly apply to routine transactions that have no anti-avoidance purpose. The proposed legislation would expand the “purpose test” to capture instances in which dividends are paid on a share, not to reduce a capital gain, but instead to (i) significantly decrease the fair-market value of any share, or (ii) significantly increase the total property costs to the dividend recipient. The proposed legislation would also restrict the related-party exception in subsection 55(3)(a) only to deemed dividends of a corporation redeeming, acquiring, or cancelling its shares under subsections 84(2) or 84(3). Thus, the related-party exception would no longer exclude cash dividends, ordinary-course dividends, and dividends paid in-kind. TEI recommends that the Legislative Proposals be revised to reinsert Ordinary Dividends into the related-party exception provided in paragraph 55(3)(a), or, in the alternative, that Ordinary Dividends be excluded from the application of the expanded purpose test in proposed subparagraph 55(2.1)(b)(ii).

TEI's Canadian Income Tax Committee prepared these comments. Grant Lee chairs the Committee, and TEI Tax Counsel John Schoenecker coordinated the preparation of TEI's comments.

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