Opco, which is owned by five Holdcos each of which are related to one another but not associated, has established a pattern of paying dividends equal to substantially all of its annual income, with the result that the Holdcos have accumulated “large” investment funds. Would s. 125(5.2) apply if this practice continues? CRA responded:
Subsection 125(5.2) … applies where the corporations are related to each other, one corporation (directly or indirectly) transfers assets to the other corporation and one of the reasons for the transfer can reasonably be considered to be to reduce the amount of the adjusted aggregate investment income of the associated group for the purposes of the passive income reduction rule in paragraph 125(5.1)(b).
Whether subsection 125(5.2) would apply in any given situation remains a question of fact … . However, if it may reasonably be considered that one of the reasons that the payment of dividends was made was to reduce the adjusted aggregate investment income as determined in paragraph E of paragraph (5.1)(b) in respect of Opco, or of any corporation with which Opco is associated, then in our view the anti-avoidance rule in subsection 125(5.2) could apply.