My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Tuesday, February 9, 2016

What Small Business Owners Need to Know - Intercorporate Dividends are not Necessarily Tax-Free Anymore

For many years, it has been standard tax planning to pay any excess cash from your operating company (“Opco”) as a dividend to your holding company (“Holdco”) for asset protection, retirement planning or other investment or business reasons. Where your Holdco is connected to your Opco (in general terms, Holdco is connected where it owns more than 10% of the votes and value of Opco), those dividends will flow tax-free to your Holdco. Where Opco has refundable dividend tax on hand, a dividend paid to Holdco can trigger Part IV tax; so speak to your accountant first.

[Note: As discussed in my blog post the Capital Gains Exemption is Not a Gimme, you may not always want your Opco to be owned directly by your Holdco].

The government became concerned taxpayers were utilizing the tax-free nature of intercorporate dividends to defer or reduce capital gains tax, especially prior to the sale of a business. Thus, the 2015 Federal budget introduced anti-avoidance rules (draft legislation was released in July, 2015 with request for comments) effective for dividends received by a corporation on or after April 21, 2015. These anti-avoidance rules have caused uncertainty in respect to the payment of what were prior to the budget, tax-free intercorporate dividends.

Currently there are “capital gains stripping " anti-avoidance rules contained in Section 55 of the Income Tax Act. These rules have been in place for years and generally are only problematic where there is a contemplated or actual sale to an arm’s length person and the payment of a dividend and an ownership change are part of the same series of transactions. These rules are very complex, but in basic terms, dividends can be paid tax-free to the extent the corporation has what is known as “safe income”, which in simplistic terms is essentially income earned by the corporation after tax. To the extent the corporation does not have safe income, the dividend in whole or part will be converted to a capital gain.

The new rules are broad and now not only catch the arm’s length sales noted in the prior paragraph, but will now capture dividends for which the purpose of the dividend “is to significantly reduce the value of the share”. This is why the new rules are troublesome. When is the standard dividend planning noted in the first paragraph, a dividend to reduce the value of a corporation’s shares?

The rules leave taxpayers and their advisors in the positions of needing to prove that the significant reduction of value that obviously occurs when the operating company pays excess cash to its Holdco is not the intended purpose of the dividend. The issue is more vexing when you consider that often the reduction of the value of Opco was intended, but was not done for tax purposes, but for business or investing purposes.

We are left with uncertainty where large dividends are paid to a holding company, including where the dividend was paid for asset protection purposes and then loaned back to the Opco. The CRA has stated that “lumpy dividends” (large one-time payments) may be considered to have been paid to reduce the value of a share, which is disconcerting.

There are other concerns including stock dividends, but they are beyond the scope of this blog post.

You should discuss with your accountant whether intercorporate dividends should be deferred until there is further clarity in respect of the legislation or whether it is prudent to undertake a calculation of safe income (which are expensive and time consuming) prior to paying a dividend, even if not in contemplation of a sale.

To reflect how much uncertainty and confusion there is with these rules; I am going to have a double disclaimer today. In addition to my usual disclaimer at the bottom of my post, I will again inform you; do not act on any of the general information in this blog post without discussing the issue with your accountant.

I will also not address or answer any of the comments and questions on this post, because of the uncertainty of the rules.

Small Business Owners - Get on my Mailing List

If you are an owner-manager and/or a shareholder in a corporation and would like to be on my corporate mailing list, please email me at

I will be sending out specific mailings on matters of importance to small business owners and I am considering, depending upon the interest, holding a roundtable for small business owners who are in the Toronto area.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.


  1. Well that's odd.

    "but will now capture dividends for which the purpose of the dividend “is to significantly reduce the value of the share”."

    I always pay dividends for the purpose of significantly reducing the value of shares of my company. Paying out a dividend of $1 reduces the value of my company by $1. And by extracting cash from my corporation, I increase the value of my person.

    Arguably, in the OpCo and Holdco situation, the purpose to decrease the value of the company shares is also to reduce the price of the OpCo so the buyer can afford to buy it.

    1. Hi Joel

      While I am not commenting on the technical aspects of this post, you clearly capture the issue here, paying a dividend reduces the value of the payor company.