Section 55(2) (intercorporate dividend rule)
Subsection 55(2) of the Income Tax Act is an anti-avoidance rule for taxable dividends received by a corporation resident in Canada. Where it applies, the dividend is deemed not to be a dividend and is treated instead as proceeds of disposition of a share or as a gain from the disposition of a capital property.
You meet this rule when a holding company receives a dividend from a corporation whose shares it later sells. The Canada Revenue Agency’s folio on taxable dividends says the rule prohibits, among other things, arrangements that convert a capital gain on shares into a tax-free dividend, which it calls capital gains stripping.
Conditions in subsection 55(2.1)
The recipient must be entitled to a deduction for the dividend under subsection 112(1) or (2) or 138(6). One of the purposes of the payment or receipt (or, for a subsection 84(3) dividend, one of its results) must be a significant reduction in the capital gain on a share; or, for a dividend received on a share held as capital property other than on a redemption, a significant reduction in a share’s value or a significant increase in the cost of property. The dividend must also exceed safe income. The Act carves out the part of a dividend subject to Part IV tax that is not refunded, and subsection 55(3) lists exceptions.
What to ask
- Which dividends were paid or planned in the series of transactions
- Whether an exception in subsection 55(3) is said to apply, and on what facts
- How a pre-sale dividend was tested against safe income
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
- 02Canada Revenue AgencyGovernmentIncome Tax Folio S3-F2-C2, Taxable Dividends from Corporations Resident in Canada
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