CRA now considers that the FMV of a share for s. 55(2.1)(c) purposes does not include a declared dividend, which it views as a separate property

In 2016-0652981C6, which concerned three corporations each holding an equal number of discretionary common shares in a corporation, a discretionary dividend was paid solely to one of the three corporations in an amount in excess of the global accumulated safe income of the corporation, with the result that the entire amount of such safe income was allocated to the recipient of that dividend. This was on the basis that the declaration of the dividend increased the FMV of those particular shares and thus the accrued gain immediately before the time of payment of the dividend for purposes of the application of s. 55(2.1)(c).

However, CRA’s 2023 Safe Income Paper (at 17.9) instead now states that the FMV of a share must be determined prior to the declaration of the dividend for purposes of computing the hypothetical capital gain under s. 55(2.1)(c). This revised CRA reasoning is based primarily on the assumption that a declared dividend constitutes a separate property from the underlying common share, so that the value of the dividend after its declaration and immediately before its payment would not contribute to the accrued capital gain on the share.

This disregarding of the contribution of a dividend to value would seem to make the safe income exception inapplicable to many dividends paid on preferred shares, for example, on a freeze preferred shares with a non-cumulative dividend entitlement. With no increase in the FMV of the share considered to result from the declared dividend, it is uncertain whether the safe income exception would apply given that such safe income would not contribute to the hypothetical capital gain on the share.

Neal Armstrong. Summary of Jordan Fournier and Jean-Benoit Thivierge, “Allocation of Safe Income: Change In the Application of the Global Approach,” Tax for the Owner-Manager, Vol. 25, 3 July 2025, p. 14 under s. 55(2,1)(c).