Stop-loss rule on share dividends (s. 112(3))

Corporate sellers meet this rule when a company, such as a holding company, sells shares at a loss after receiving dividends on them. Under paragraph 112(3)(b), the loss is reduced by taxable dividends received on the share to the extent they were deductible under section 112, subsection 115(1) or 138(6), by dividends tied to a subsection 83(2) election where subsection 83(2.1) does not deem them taxable, and by life insurance capital dividends. See paying a dividend before a sale.

Limits and exceptions

The rule is subject to subsections 112(5.5) and 112(5.6). Under subsection 112(3.01), a qualified dividend is left out of the total if the taxpayer establishes that it was received while the taxpayer and non-arm’s-length persons owned no more than a stated share of the class, and on a share owned throughout the 365-day period before the disposition. Subsections 112(3.1) and 112(3.2) deal with shares held through a partnership or a trust, and subsection 112(7) treats a share acquired in a section 85.1 exchange as the old share, with exceptions.

What to ask

• Which dividends were paid on the shares before the sale, and of what kind
• Whether an exception in subsection 112(3.01) is available and can be shown
• Whether the shares came from an earlier exchange or reorganization