CRA says it would limit s. 55(2) gain only to amounts in excess of safe income

Published by Ian Gamble

A tax-free inter-corporate dividend in Canada can sometimes be converted into a taxable capital gain under s. 55(2) if the purpose of the dividend (or the effect of the dividend if the share is redeemed) is to reduce the accrued gain on the share and the gain is attributable to anything other than underlying income that has been earned and retained (Safe Income).  In 2014-0522991C6, the CRA confirmed its long-standing assessing practice to apply s. 55(2) only to the amount by which the dividend paid on a share is greater than the Safe Income attributable to the share, notwithstanding that technically the entire dividend could be assessed as a capital gain under s. 55(2).  Accordingly, even if a corporate taxpayer (for some reason) self-assessed the entire dividend as a capital gain under s. 55(2), the CRA would reassess to reverse this result to account for underlying Safe Income – invoking the general anti-avoidance rule in s. 245 if necessary.