2011 Federal Budget—Stop-Loss Rules on the Redemption of a Share

The federal Budget tabled on June 6, 2011 included no changes to the income tax measures originally announced in the Budget on March 22, 2011.

The Income Tax Act contains a basic rule which provides that dividends paid between Canadian corporations may be received free of income tax.  This concept is taken into account, in most cases, when determining the loss realized by a corporation on the disposition of a share held by it upon which a tax-free dividend was received. These rules are referred to as the “stop-loss rules” and they generally reduce the amount of a loss realized by the amount of tax-free dividends received or deemed to have been received by the corporation disposing of the shares. However, there is an exception from the stop-loss rules that applies if (i) the share is held by the shareholder for 365 days or more; and (ii) the shareholder (together with all persons who do not deal at arm’s length with the shareholder) owns 5% or less of the class of shares upon which the dividend is received. The Budget proposes to narrow the existing exception and thus broaden the application of the stop-loss rules to any deemed dividend arising on the redemption of shares held by a corporation (whether the shares are held directly or indirectly through a partnership or trust). However, the proposed rules will not apply where the shares redeemed were issued by a private corporation and held by a private corporation (other than a financial institution) whether directly or indirectly through a partnership or trust (other than a partnership or trust that is a financial institution). This change will apply to redemptions that occur on or after March 22, 2011.


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