When declaring dividends it is important to be aware that your company may be susceptible to a reassessment by the Canada Revenue Agency (“CRA”). This is something you want to avoid, therefore knowing when reassessment can be triggered can be important to your business. I’ve provided a surface-level analysis of the relevant issues, below but be careful to consult your accountant or a tax lawyer for further clarification.
The CRA will opt for a reassessment if they disagree with a taxpayer’s filing. In general, the CRA can order a reassessment when they have some suspicion or reason to believe that a tax filing is inaccurate. This can be triggered in several circumstances, such as (among others):
- a corporation declaring dividends in a manner contrary to the company’s articles and regulations or other constating document;
- a corporation that has not paid income tax decides to declare a dividend;
- if the principal purpose of a transaction can be inferred as an attempt to avoid, reduce or defer the payment of tax or if the dividend is part of a larger set of transactions, which involves other activities such as tax deference, the CRA may reference the General Anti-Avoidance Rule (“GAAR”) of the ITA, or other similar provincial anti-avoidance rules, and order a reassessment. For example, a reassessment can occur when a company has committed a series of transactions, which created the suspicion of an elaborate tax avoidance scheme, based on the following criteria:
- the transaction results in a tax benefit;
- the transaction is an avoidance transaction;
- the transaction may reasonably be considered to result in a misuse or abuse of taxing legislation;
- when a corporation pays dividends directly before its shares are sold (called a “Capital Gains Strip”) for the purpose of converting a taxable capital gain from the disposition of shares into a tax-free intercorporate dividend; and
- if shareholders receive stock dividends that should have been included in the calculation of income, but were excluded.
The purposes of a reassessment are usually motivated by the intention to assess tax avoidance actions by a company or an individual, where the CRA has concluded that certain transactions are not performed for bona fide reasons.
While it is not possible to predict when a reassessment will occur, to avoid reassessment, seek expert advice on matters relating to tax, and act in good faith and based on advice of counsel.