Lesson  6 -  Part 3 - DEEMED DIVIDENDS

The ITA contains rules to deem certain payments which otherwise might not be considered to be dividends to be dividends for tax purposes.  These rules apply to amounts paid to shareholders as a return of capital on a winding-up, discontinuance or reorganization of its business, on a redemption, acquisition or cancellation of its shares or on a reduction of its capital.

Deemed dividends are treated for all purposes of the ITA as ordinary dividends; ie. subject to the gross-up and credit if received by an individual, or deductible in computing taxable income if received by a corporation.

The deemed dividend provisions are contained in section 84.  A deemed dividend is determined by comparing the amount of any distribution or acquisition by the corporation to the PUC.

The deemed dividend rules are used, among other things, to prevent a conversion of retained earnings to capital.  Without section 84 a corporation could, for example, convert its retained earnings to capital by simply increasing the PUC of its shares.

The corporation would then be able to return a larger amount to its shareholders as a tax-free return of capital.