On November 12, 2015, the Joint Committee of the CBA and the CPAC (the JC) urged the Department of Finance (Finance) to narrow the disruptive changes being proposed to s. 55(2). The latter is an anti-avoidance rule which can convert tax-free inter-corporate dividends into taxable capital gains. The main problem is the new purpose test: it is far too broad. The test shifts the focus from (A) a dividend that reduces a gain which would otherwise be realized on a disposition of a share (the existing test), to (B) a dividend that reduces the value of a share or increases the cost of the dividend-recipient’s property (the newly expanded test). The expanded test arguably catches all dividends, which is clearly inappropriate in tax policy terms. The JC suggests narrowing the expanded test to focus on transactions that give rise to a loss (see page 4). Alternatively, if Finance is not prepared to do this – which seems evident so far – the JC suggests the Explanatory Notes to s. 55(2) expressly state circumstances in which the rule is not intended to apply, including the following:
- Dividends are commonly paid within a corporate group for the principal purpose of moving cash from one corporation to another corporation for non-tax reasons (i.e., servicing debt, paying other expenses, re-deploying cash, or paying dividends to ultimate shareholders of the parent). These dividends should never be at risk under s. 55(2) – regardless of the safe income position of the group (see page 4).
- Ordinary loss consolidation transactions should also never be at risk under s. 55(2). The only purpose of these transactions is to consolidate losses or expenses within a corporate group (see page 5).