When Safe Income Isn’t so Safe
The Income tax act contains a number of anti-avoidance provisions. Subsection 55(2) apples to convert some intercorporate actual or deemed dividends into capital gains or proceeds of disposition, respectively..
This provision was created when capital gains tax rates were higher than dividends. The intent of the section is to allow companies to move their tax paid retained earnings (“Safe Income”) out of, say, an operating company to a holding company, tax free since intercorporate dividends of this nature are often tax free. There is no further tax paid until the amounts are paid out as dividends to a shareholder who is a “natural person” where the amounts are taxed as eligible or “ineligible” dividends.