Related-party exception (s. 55(3)(a))

A holding company seller meets this term when a dividend moves between related corporations before a sale and subsection 55(2) could otherwise apply. Finance’s explanatory notes describe paragraph 55(3)(a) as an exemption for dividends received in the course of certain related-party transactions, meant to facilitate bona fide corporate reorganizations by related persons.

What the paragraph looks at

• A disposition of property to a person or partnership that was an unrelated person immediately before that time, other than money disposed of on paying a dividend or reducing paid-up capital, or property disposed of for proceeds not less than its fair market value
• A significant increase in unrelated persons’ total direct interest in any corporation, other than as a consequence of a disposition of shares for proceeds not less than their fair market value
• A disposition to an unrelated person of shares of the dividend payer, or of other property whose value was derived, beyond a portion the paragraph sets, from shares and debt of the dividend payer; or, after the dividend, the same kind of disposition of shares of the dividend recipient or property deriving value from its shares and debt
• A significant increase in unrelated persons’ direct interests in the dividend payer

What to ask

Ask whether any of those events occurs at any time in the series, including a later sale to an unrelated buyer. Subsection 55(3.01) adds interpretation rules for the paragraph, so read it with the paragraph. Related reading: subsection 55(2), safe income, and the answer on a large pre-sale dividend and safe income.