Deemed dividend

An owner meets this term when taking money out of a company by having it buy back shares, or when selling shares to a company the seller does not deal with at arm’s length. The Income Tax Act can then treat part of the payment as a dividend. CRA’s Income Tax Folio S3-F2-C2 says a deemed dividend receives the same tax treatment under the Act as a pro rata distribution by a corporation to its shareholders.

Where the Act deems one

• Section 84(3): a corporation resident in Canada redeems, acquires or cancels its own shares, and the amount paid exceeds the paid-up capital of those shares. The subsection has exceptions, including in subsection 84(6).
• Section 84.1: a taxpayer resident in Canada, other than a corporation, sells shares to a corporation with which they do not deal at arm’s length, in the circumstances the section sets out.
• CRA’s Folio says other parts of section 84 can deem a dividend on some increases and reductions of paid-up capital and on a distribution on the winding-up, discontinuance or reorganization of a business.

What to check or ask

Ask which provision would apply, what the paid-up capital of the shares is, and whether an exception or election is available. Section 84.1 has its own conditions for certain intergenerational business transfers; see selling to a child’s company without a deemed dividend. For the buy-back mechanism itself, see share redemption.