Opco pays a dividend of $1,000 to Holdco. Its shares had a pre-dividend fair market value of $1,500. As the safe income that can reasonably be viewed as contributing to gain on Opco shares was $900, does s. 55(5)(f) deem two separate dividends of $900 and $100? Are both dividends separately tested under s. 55(2.1), so that the $900 is exempt as not exceeding safe income, and the $100 is exempt if its purpose is not to significantly reduce the gain or the value of the shares on which it is paid?
CRA indicated that under the old s. 55(2) regime, it was well understood that the purpose test applied to the whole dividend, so that the s. 55(5)(f) only required the inclusion under s. 55(2) of the portion of the dividend exceeding safe income. The new rules did not change this. The contrary interpretation would results in duplication of the safe income protection, and contrary to the s. 55(5)(f) purpose of bringing into income the amount by which the dividend exceeds safe income.
Under an appropriate purposive reading, the dividend referred to in:
- the s. 55(2.1) preamble and in ss. 55(2.1)(a) and (b) is the whole $1000;
- s. 55(2.1)(c) is the portion exceeding safe income ($100);
- the s. 55(2) preamble is the whole $1000; and
- the s. 55(2) preamble that is deemed not to be a dividend but to be a gain, is the s. 55(2.1)(c) amount ($100).