2016-0658841E5 indicates that paying a dividend of surplus assets with the goal of purifying the corporation for “qualified small business corporation share” (QSBCS) purposes would be a relevant factor that should be taken into account, but that it should be ensured that the dividend has no other purpose described in paragraph 55(2.1)(b) so that, for example, if the dividend paid to the corporation exceeds the amount that would be required to transfer the surplus assets, this could be a sign that the dividend has another purpose.
Q.(a)
If the dividend’s only purpose is to maintain QSBCS status, the dividend should not have a purpose (but might have the result) of reducing the FMV or the gain on the shares. In this situation, would CRA agree that the purpose tests are not met?
CRA indicated that whether the payment of a dividend can be viewed as having only the purpose of maintaining QSBCS status, but has no purpose of reducing the value of the gain on the share or increasing the cost of property to the dividend-recipient, is a factual determination. It went on to indicate that where the dividend is paid with non-surplus assets, that may signify that it has a purpose referenced in s. 55(2.1)(b), and that another such sign could be where the removal of a surplus asset is made in contemplation of the disposition of the shares of a corporation.
CRA went on to question why on the facts there was no safe income corresponding to the surplus assets.
Q.(b)
Is the test under Ludco the right test to use to determine “purpose” as contrasted to that in Placer Dome?
After quoting the statement in Ludco that “courts should objectively determine the nature of the purpose, guided by both subjective and objective manifestations of purpose,” CRA indicated that Ludco followed the purpose test in Symes, and the Symes/ Ludco test (consistently with many other decisions) constitutes the benchmark of purpose. In both Placer Dome, and McAllister Drilling referenced therein, the Court determined the purpose of the taxpayers by not only listening to their testimony, but also by examining all the facts, so that neither contradicts Ludco and Symes.