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):

  1. a corporation declaring dividends in a manner contrary to the company’s articles and regulations or other constating document;
  2. a corporation that has not paid income tax decides to declare a dividend;
  3. 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:
    1. the transaction results in a tax benefit;
    2. the transaction is an avoidance transaction;
    3. the transaction may reasonably be considered to result in a misuse or abuse of taxing legislation;
  4. 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
  5. 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.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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