Are Budget 2015’s section 55 proposals too broad? Finance seeks examples

Budget 2015 takes aim at capital gains tax avoidance involving inter-corporate dividends, but could hit long-accepted commercial transactions. Are the proposals wide of the mark? Your examples might persuade Finance to have another look.

The Income Tax Act’s section 55 provides tax relief for corporate reorganizations, and Budget 2015 will fundamentally alter how it operates. The changes amend an anti-avoidance rule within the section to prevent certain strategies that reduce taxable capital gains inappropriately.

Since budget day, many practitioners have worried that the proposed changes could inadvertently catch many common corporate transactions that raise no concern from a tax policy point of view.

Chartered Professional Accountants of Canada (CPA Canada)’s Tax Policy Committee recently met with Finance officials, and section 55 was among the topics discussed. Finance asked committee members for examples of common commercial transactions where the proposed changes are a concern — a request that we hope Finance made with an eye to better targeting the rules.

As one example, the changes could upset a common, acceptable strategy that employs a holding company to protect assets. Under these plans, a dividend is paid to the holding company and loaned back to the business corporation. With the proposed changes, this transaction could create an immediate deemed capital gain, even where there is no intention to sell the business in the future. At a minimum, the change would require a detailed calculation of safe income that would not have been needed in the past.

The Joint Committee on Taxation of the Canadian Bar Association and CPA Canada raised these and other concerns with Finance in a recent submission. The committee recommends an alternative approach that would narrow the focus to target abusive transactions only.

KEEP THE CONVERSATION GOING

I want to hear from you. Are you aware of any common transactions inadvertently affected by the proposed changes to section 55 that Finance should know about? Please post the details below.

CPA Canada’s Tax Blog is designed to create an exchange of ideas on tax policy and practice issues, and their impact on those who practice tax. Your comments can provide helpful input into the public interest advocacy positions developed by CPA Canada.


About the Author

Gabe Hayos, FCPA, FCA, ICD.D

Vice-president, Taxation, CPA Canada

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