Holdco holds 100% of Opco’s participating shares, which have a value of $100,000, paid-up capital and adjusted cost base of $1 and safe income attributable thereto of nil. Opco has a cash balance of $100,000, which it would dividend to Holdco to acquire an immovable for leasing to Opco for use in Opco’s business. Would one of the purposes of the dividend be described in s. 55(2.1)(b)(ii)? Alternatively, in order to avoid the potential application of s. 55(2) to the payment of an actual dividend, could Opco purchase for cancellation 99.99% of the participating shares held by Holdco for $99,999?
Respecting the first situation, in the course of noting that determining the purpose of the dividend was a question of fact, as to which CRA noted factors for assessing the motivation behind the purpose, CRA stated:
[T]he payment of a dividend for the purpose of acquiring an immovable must be assessed taking into account that the property could have been purchased by Opco instead of Holdco. There could therefore be a purpose similar to that of protecting the assets from risk inherent in the carrying on of the Opco business, a purpose that we have already characterized as the purpose of reducing the value of shares.
Respecting the second situation, CRA stated:
[T]he utilization of paragraph 55(3)(a)…in order to replace a dividend not coming out of safe income, could be determined to be offensive.
[S.] 55(3)(a) is intended to facilitate corporate reorganizations made in good faith by related persons but is not intended to accommodate the payment or receipt of dividends or transactions or events which seek to increase, manipulate or manufacture tax basis.
Thus, the application of the general anti-avoidance rule in subsection 245(2) should be queried, considering that the money given to Holdco would not come from the income that had already been taxed in Opco and that the adjusted cost base of participating shares in the capital stock of Opco would be nominal.