Income Tax Act — I-3.3 55
pient’s entitlement to a deduction under subsection 112(1) or (2) or 138(6) in respect of the amount of that dividend are to be determined as if paragraph (b) of the definition amount in subsection 248(1) read as follows: (b) in the case of a stock dividend paid by a corporation, the greater of (i) the amount by which the paid-up capital of the corporation that paid the dividend is increased by reason of the payment of the dividend, and (ii) the fair market value of the share or shares issued as a stock dividend at the time of payment, Stock dividends and safe income (2.3) If this subsection applies in respect of a stock dividend (a) the amount of the stock dividend is deemed for the purpose of subsection (2) to be a separate taxable dividend to the extent of the portion of the amount that does not exceed the amount of the income earned or realized by any corporation — after 1971 and before the safe-income determination time for the transaction, event or series — that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at fair market value, immediately before the dividend, of the share on which the dividend is received; and (b) the amount of the separate taxable dividend referred to in paragraph (a) is deemed to reduce the amount of the income earned or realized by any corporation — after 1971 and before the safe-income determination time for the transaction, event or series — that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at fair market value, immediately before the dividend, of the share on which the dividend is received. Application of subsection (2.3) (2.4) Subsection (2.3) applies in respect of a stock dividend if (a) a dividend recipient holds a share upon which it receives the stock dividend; (b) the fair market value of the share or shares issued as a stock dividend exceeds the amount by which the paid-up capital of the corporation that paid the stock dividend is increased because of the dividend; and (c) subsection (2) would apply to the dividend if subsection (2.1) were read without reference to its paragraph (c). Determination of reduction in fair market value (2.5) For the purpose of applying clause (2.1)(b)(ii)(A), whether a dividend causes a significant reduction in the fair market value of any share is to be determined as if the fair market value of the share, immediately before the dividend, was increased by an amount equal to the amount, if any, by which the fair market value of the dividend received on the share exceeds the fair market value of the share. Application (3) Subsection 55(2) does not apply to any dividend received by a corporation (in this subsection and subsection 55(3.01) referred to as the “dividend recipient”) (a) in the case of a dividend that is received on a redemption, acquisition or cancellation of a share, by the corporation that issued the share, to which subsection 84(2) or (3) applies, if, as part of a transaction or event or a series of transactions or events as a part of which the dividend is received, there was not at any particular time (i) a disposition of property, other than (A) money disposed of on the payment of a dividend or on a reduction of the paid-up capital of a share, and (B) property disposed of for proceeds that are not less than its fair market value, to a person or partnership that was an unrelated person immediately before the particular time, (ii) a significant increase (other than as a consequence of a disposition of shares of the capital stock of a corporation for proceeds of disposition that are not less than their fair market value) in the total direct interest in any corporation of one or more persons or partnerships that were unrelated persons immediately before the particular time, (iii) a disposition, to a person or partnership who was an unrelated person immediately before the particular time, of (A) shares of the capital stock of the corp