Intercorporate Dividends – Do the new rules affect your business?
In past years dividends paid by a private Canadian resident corporation to
another private Canadian resident corporation were generally non-taxable.
There were some provisions in Subsection 55(2) of the Income Tax Act
(“the Act”) to prevent abuse (“Anti-Abuse”) of the intercorporate dividends
but they were limited in scope.
Recent changes to the Act have expanded the scope of the Anti-Abuse
provisions and many dividend payments that may have been non-taxable in
the past might now fall under the new expanded provisions.
What does this mean?
If a dividend is paid out of safe income on hand (“SIOH”) then normally it
will be exempt from the expanded provisions and continue to be nontaxable.
SIOH is, generally speaking, the income that has been earned,
taxed and retained in the corporation. If a dividend falls under the
expanded provisions, meaning that it is not paid out of SIOH, part of or the
entire dividend may be reclassified as a taxable capital gain. The recipient
corporation would now have a reportable taxable capital gain and would
have to pay corporate tax on the gain accordingly.
It will now be important for companies to maintain up to date safe income
calculations or contact us prior to paying out intercorporate dividends to
discuss the new provisions and potential risk and tax implications of a
possible re-characterization of the dividend to a taxable capital gain.