Form 1120 C Dividends 2023-2024

Hi, I'm John McLeroy and welcome to today's presentation on inter corporate dividends. We're going to take a look at section 55(2) of the Income Tax Act. As some of you might be aware, the April 2015 budget brought a lot of changes, and inter-corporate dividends are a big part of many corporate structures, even for relatively small and modest owner-managers. So, this is something that can really impact the way we do business. I get a lot of questions about this from clients, so I thought I'd make this short video to explain it in more detail and refer them to the video for a more detailed explanation of the changes. So, what is section 55(2) all about? In simple terms, it's an anti-avoidance rule. Let's see how it works. Imagine you're an owner-manager and you have a holding company (HoldCo) that owns shares in an operating company (OpCo). Let's say OpCo has a fair market value of $1,000 and an adjusted cost base (ACB) of $100. Now, you want to sell off the shares and a buyer comes along and buys them. What are the tax consequences? Well, if you sell the shares for their fair market value, which is $1,000, and your ACB is $100, you would have a capital gain of $900. But is there a way to avoid this capital gain? What if, for example, OpCo first paid a dividend of $900 to HoldCo? Why would you do that? Well, in many cases, it used to be tax-free to flow dividends from one company to another, at least it used to be. And then, after the tax dividend is paid, the fair market value of OpCo would be reduced by $900 to $100, and since the ACB is also $100, your capital gain would be zero. This...