January 28, 1992
Winnipeg District Taxation Office Round Table
Question 25 - Waived or Discretionary Dividends
What is Revenue Canada's assessing policy with regard to:
(a) dividends payable at the discretion of the directors on different classes of common shares; and
(b) the waiver of dividends;
where all of the shareholders are not dealing at arm's length with one another?
Would Revenue Canada's position be different if the shareholders are dealing at arm's length with one another?
Department's Position
(a) In the Department's view the Supreme Court decision in McClurg (91 DTC 5001) is limited to the particular facts and situation which the Court addressed in that case. In non-arm's length situations the Department will, therefore, invoke the provisions of subsection 56(2) of the Income Tax Act where the shareholders receiving the discretionary dividends did not make adequate contributions, financial or otherwise, to the corporation.
(b) Generally, the Department's position regarding waived dividends remains as set out in the responses to:
(i)
Question 26 of the 1981 Revenue Canada Round Table; and
(ii)
Question 24 of the 1984 Revenue Canada Round Table.
As indicated in our responses to the Round Table questions referred to in (b) above, the provisions of subsection 56(2) of the Act will not generally be applied where the shareholders of a corporation deal at arm's length with one another. However, the final determination would depend on the facts of each case.
Prepared by Simon Leung
August 19, 2001