Navigating the Updated Anti-Avoidance Rule
Think twice before declaring a dividend to your holding company.
New rules make it tougher to move cash from your operating company to your holding company. As you are aware, this step is often done to protect the cash from your operating company from creditors. While this step is still important, how you do this has become more tricky as you can potentially trip capital gain taxes on an otherwise tax free dividend.
This post discusses recent changes to section 55(2) and its effect on the amount of applicable taxes. We also outline how to best navigate and utilize section 55(2) as well as longer term considerations for corporations.
How to navigate 55(2)
Optimizing your business with the new rules can still be accomplished – but there is a twist. Previous to the updated rules, cash could be transferred from an operating company to a holding company tax free. There was an exception in the Act to ensure 55(2) was not tripped. That exception has now been narrowed.
The related party exception that applied before now only applies to the extent that there is a redemption of shares. The dividend resulting in a share redemption will generally not be subject to new rules. There are other ways to navigate the new rules, so careful planning must be done when contemplating large dividends to your holding company.
Can we take advantage of the new rules?
There can be situations where shareholder remuneration strategy may include tripping the new rules on purpose. Carefully doing this could affect your effective personal tax rate by 10% – 15%.
“We need to think beyond the old dividend vs. salary analysis to understand which strategy will work best for you.” – Diane Hall, Accounting Partner
Purifying your balance sheet 55(2)
Don’t let the new rules prevent you from accessing your Enhanced Capital Gains Exemption. One of the benefits of removing excess cash from your operating company is to ensure that the shares of your operating company remain qualified small business corporation shares (QSBCS) – i.e. 90% of its assets have to be used in an active business operating in Canada. Fearing these rules and leaving a lot of cash in your operating company may disqualify you from sheltering $830,000 of capital gains per family member.
We recommend you continually monitor your operating company to ensure it’s compliant with the 90% rule.
What to do next?
Do you have a “Triangle Structure” as illustrated below? Are you unsure how 55(2) will affect you? Get in touch with us to support you in optimizing your financial situation: Info@nuvero.ca // 587.320.3940