Principal Issues: For the exception in 55(5)(e)(i) to apply to a 55(3)(a) reorg, do both of the dividend payer and dividend recipient have to be corporations the shares of which qualify as shares of a QSBC or family farm or fishing corporation, or only one of the dividend payer or dividend recipient has to so qualify?
Position: Only one of them.
Reasons: Wording of the provision.
XXXXXXXXXX 2021-092126 (819) 327-3357
March 23, 2022
Dear XXXXXXXXXX
Re: Subparagraph 55(5)(e)(i)
This is in response to your correspondence of November 9, 2021 in which you requested our guidance on subparagraph 55(5)(e)(i) as it was amended by Bill C-208.
You questioned whether both the dividend payor and recipient have to be corporations the shares of which are shares of a qualified small business corporation – or if only one of the dividend payor or dividend recipient has to be such corporation.
Your reasoning was that “because the wording says the dividend received or paid – this to me suggests that both the dividend payor and recipient corporation have to meet the exemption in order for 55(5)(e)(i) to apply.”
Unless otherwise stated, all statutory references herein are to the Income Tax Act (Canada).
As you know, Bill C-208 was a Private Member’s bill that did not originate from the Department of Finance and there were no technical notes accompanying the bill.
Your question is relevant as it illustrates the complexities and intricacies that can originate from a very simple proposal. A strict reading of subparagraph 55(5)(e)(i) indicates that either the dividend payer or the dividend recipient has to be a corporation (herein referred to as “such corporation”) the shares of which are qualified small business corporation shares or shares of the capital stock of a family farm or fishing corporation, and not both, because brothers and sisters are not deemed to be unrelated and dealing with each other at arm’s length where the dividend is received or paid by such corporation.
It is difficult to deduce the rationale that requires only one of the dividend payer or dividend recipient to be such corporation. However a textual, contextual and purposive interpretation of subparagraph 55(5)(e)(i) does not allow us to override its wording, as the members of Parliament’s debate on Bill C-208 indicates that the purpose of the Bill was to benefit small businesses or family farm or fishing corporations.
Our view is that requiring only one of the dividend payer or recipient to be such corporation is in accordance with the intent of the provision.
However, we would remind you that the use of the paragraph 55(3)(a) exemption is subject to the views we expressed in previous published documents such as 2017-0693411C6, 2015-0610681C6 and 2015-0604521E5, i.e, that paragraph 55(3)(a) is restricted in its application to subsection 84(3) dividends in order to facilitate bona fide internal reorganizations and is not intended to provide taxpayers with a tool to create or multiply ACB.
We trust the above comments to be of assistance.
Yours truly,
Stephane Prud’homme
Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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