Canco B repurchased its shares held by its parent, Canco A (which have an ACB and PUC of $100) for $1,000, thereby producing a deemed dividend of $900, which is deemed by s. 55(2) to be proceeds of disposition.
Although the appropriate policy result is for there to be a single capital gain of $900, there is some circularity in the drafting of s. (j)(i) of the definition of "proceeds of disposition" in s. 54 and s. 55(2)(b), namely:
- s. (j)(i) of the definition of “proceeds of disposition” reduces the proceeds of disposition otherwise received ($1000) by the amount of any dividend deemed to be received under s. 84(3) “except to the extent the dividend is deemed by paragraph 55(2)(b) to be proceeds of disposition of the share”
- s. 55(2)(b) deems the dividend to be proceeds of disposition of the share that is redeemed “except to the extent that the dividend is otherwise included in those proceeds.”
Could there be one $900 capital gain on the disposition without s.(j)(i) of the definition of proceeds of disposition applying, and a second one under s. 55(2)(b)?
CRA indicated that it did not read these provisions as creating circularity. In any event, if such a possibility did exist, it would take a purposive approach to avoid an absurd result. Accordingly, there would be only one capital gain ($900).