In 2016-0626781E5, the Canada Revenue Agency (CRA) was asked to consider the case of an existing private company (Opco), wholly-owned by Mr. A, which later issued a separate class of shares to Mr. A’s spouse (Mrs. A) for nominal consideration.  Dividends could be declared on either class of shares to the exclusion of dividends on the other class (commonly referred to as dividend-sprinkling shares).  The CRA was non-committal in its response, but noted the following:

  • One could “take the position” that a s. 15(1) taxable shareholder benefit arises for Mrs. A at the time of the share issuance because “an economic advantage” has been conferred by Opco on Mrs. A (see page 3);
  • Mr. A might be viewed as transferring an interest in or a right to dividends to Mrs. A, resulting in a disposition by Mr. A and the possible application of the attribution rule in s. 74.1(1).
  • The CRA has generally not applied the general anti-avoidance rule in s. 245 (the GAAR) to dividend-sprinkling share structures, butonly in those cases identical to Neuman v. The Queen, [1998] 3 CTC 177 (a case in which the SCC said that s. 56(2) does not apply to dividend income).  The CRA confirmed that it might well consider the GAAR in other dividend-sprinkling share arrangements (see page 3).