New Rules for Intercompany Dividends

Many people use a holding company for investments in the stock market. To allow investments, in many cases the holding company received a dividend from an active private company, and this money was received without tax consequences. A dividend received from a company under common controli does not trigger any taxes as the law permits the deduction of dividends when calculating taxable income. However, new rules proposed in the last budget and in a bill from July 31, 2015 could have significant monetary impact on some corporate shareholders.

Old Rules

Until April 21st, before the last federal budget, the transfer of money between companies under common control did have not a fiscal effect, if:

  1. shares were not issued to a third party as part of a series of transactions in which the dividend was received; or if
  2. the dividend did not exceed the income earned in a class of shares.

In other cases, the Canada Income Tax Act ("ITA") states that the dividend is a capital gain. But a capital gain has the disadvantage of triggering income taxes because, contrary to a dividend, the ITA provides no deduction for this type of income.

The rules that were existed before April 21, 2015 easily allow for the free transfer of taxes on surplus cash between various companies. Moreover, to achieve this, different classes of shares could be used by private companies, and the characteristics of these shares did not affect the result.

Proposed Rules

One of the new requirements is particularly troubling. According to the new wording, a dividend may only be received tax-free if the income is accumulated on the same class of shares on which the dividend is paid. Previously, this test was performed on all classes of shares.

To transfer cash surpluses, some private companies use shares with discretionary dividends. The characteristics of these shares make it possible to assign a dividend priority over other categories without triggering a capital gain. These shares were used in the past to allow the establishment of an optimal structure; the shares allowing for a capital gain were held by individuals or by entities eligible for tax benefits (capital gains deductions, losses carried forward, etc.) and those with discretionary dividends were held by holding companies which could deduct the dividend.

However, according to tax theory, no income accumulates on shares entitled to discretionary dividends, because the shares do not participate in capital gains. Thus, under the new rules, any dividends paid on these shares will trigger a capital gain for the company that receives them. The new requirements somehow have the result of requiring a shareholder to hold common shares in order to benefit from a tax deferral.


Many corporate structures may need to be reviewed in light of the new rules. It is still too early to propose solutions to this problem because the legislation has yet to be ratified and its final wording is still unknown. Nevertheless, according to the current text, redemption of shares or the use of a trust would address the problem while maintaining an optimal structure.

i For the purpose of this text, this term is used as "related corporation" is defined in section 251 of the ITA. This term also includes "connected partnership" as defined in section 186 of the ITA.

The author

Patric Saint-Onge

Patric Saint-Onge

CPA, CA, LL.M.Fisc., TEP, Tax Specialist.
Patric Saint-Onge has been a tax specialist for over 15 years. In 2002, he co-founded the firm Corriveau Saint-Onge Inc. which specializes in Canadian taxation.

Mr. Saint-Onge has worked on major tax cases, applying complex fiscal concepts throughout his career.

He has also been a speaker on numerous occasions for both industry professionals as well as the general public. Among others, the Institute of Chartered Accountants of Quebec has requested his services as a speaker. He has also been invited as an expert in taxation on several television and radio shows, and frequently collaborates with journalists covering the economy to help with articles on various topics.