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Dividendes inter-corporatifs, Paragraphe 55(2) et le Revenu Protégé

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Inter-Corporate Dividends, Subsection 55(2), and Safe Income


The calculation of safe income has recently become important for business owners and their advisors in determining how to pay inter-corporate dividends. Generally, inter-company dividends can be paid tax-free in most privately owned businesses, provided that Subsection 55(2) does not apply to the dividend. If Subsection 55(2) does apply, the tax-free dividend is recharacterized as a taxable capital gain. Subsection 55(2) is an anti-avoidance rule that targets capital gains stripping (i.e. the transformation of a capital gain into a tax-free intercorporate dividend). With new legislative amendments expanding the range of transactions caught under subsection 55(2), maintaining an up-to-date safe income calculation has become required for many businesses.

Safe income can best be summarized as “tax-adjusted retained earnings”. CRA has never released a definitive administrative position on how to calculate safe income, nor is it a defined term in the Act. Nevertheless, the starting point to calculate safe income is to calculate the income that has been subject to income tax and retained in the company. All non-deductible expenditures (aside from capital expenditures) must be deducted, any refundable dividend tax on hand (“RDTOH”) is ignored until a dividend is paid and the RDTOH is “received”, scientific research and experimental development (“SR&ED”) expenditures are deducted, and investment tax credits (“ITCs”) are deducted. Accounting reserves are deducted from the safe income pool (unless the reserve is of a capital nature), as are contingent liabilities and capital losses of non-private corporations. Finally, non-capital losses reduce safe income when they are realized, as do dividends when they are paid or payable. The safe income balance of a corporation is something that must be monitored on a regular basis. Generally, a tax accountant is in the best position to provide the safe income calculation as they are familiar with the financial statements and tax returns for the companies.

If you have a specific question regarding inter-corporate dividends and subsection 55(2), please contact one of our tax lawyers for a free consultation.


JGW Business and Tax Law LLP

This document is not to be used or interpreted as legal or tax advice.  Professional advice is required.


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