9 October 2015 APFF Roundtable Q. 12, 2015-0595601C6 F - Proposed legislation - subsection 55(2) -- summary under Subsection 55(2)

Holdco holds shares of Opco with a nominal ACB and no safe income. In a corporate reorganization "aimed at protecting the assets of Opco, whose purpose is to reduce the fair market value (FMV) of Holdco’s shares in Opco," Holdco lends money to Opco equal to the accrued gain on the shares (of $1M), and receives that money back as an actual $1M dividend. It does not matter if this transaction has no capital gains avoidance purpose. CRA accepted that since the purpose of the creditor-proofing is to reduce the fair market value of the Opco shares, the full amount of the dividend is deemed to be a capital gain. Furthermore, there is no relief if the dividend from Opco is subject to Part IV tax, but this tax is refunded as a result of payment of an equivalent dividend to the individual shareholder of Opco. Under the new rules, it does not matter that the individual is not a corporation eligible for the s. 112(1) deduction, so that the dividend amount will still be deemed to be a capital gain.