The 2015 Federal Budget proposals to section 55 may cause otherwise tax free inter-corporate dividends to be subject to taxation as proceeds of disposition (ie., capital gains) that previously were  exempt from the ambeit of section 55. Computation of safe income or post-1971 tax retained earnings may now be required in every instance to ensure one is not caught. Timely section 55(5)(f) designations filed by the recipient corporation may also have to be made. The proposal was to be effective for dividends paid after April 20, 2015. Hopefully there will be further consultation on the matter and the final legislation will only affect those circumstances to which the proposal was  intended.

Caution should be made to  companies currently paying dividends  or wishing to implement various purification techniques, capital gains crystallization and other restructuring that may involve section 55 of the Income Tax Act before the legislation if finalized and passed into law. Likely nothing will be known for sure until Christmas after the October 2015 federal election and generally when legislation is passed into law.

Original Post By:  Larry Stolberg