Author: Ryan Greer


For most taxpayers who are shareholders of a private corporation withdrawing money from the company will be accomplished by way of either an ineligible dividend (on active business income below $500,000) or an eligible dividend (on active business income above $500,000). In 2019 the highest marginal tax rate in British Columbia was 44.64% on ineligible dividends and it was 31.44% on eligible dividends. Canada’s Income Tax Act is generally very good at ensuring that taxpayers do not withdraw funds from their corporation other than by declaring an ineligible or eligible dividend.


One exception to this general rule is when a corporation realizes a capital gain it is able to pay 50% of the capital gain to its shareholders as a tax-free capital dividend. This effectively reduces the combined tax rate on a capital gain to approximately 25%. If a corporation owns capital property (i.e. land/building) with an accrued gain there is a planning opportunity to trigger capital gains and distribute its retained earnings at a lower tax rate. With the meteoric rise in real estate prices in the Lower Mainland in the past few years many companies may be sitting on potential tax savings.


The planning outlined above could be implemented with the following transaction steps:


  1. Opco transfers land and building to a newly incorporated subsidiary (“Newco”) under subsection 85(1) and elects to trigger a capital gain on the land (Note: the building is transferred at UCC to avoid recapture).
  2. After the transfer Opco and Newco amalgamate to form a new company (“Amalco”).
  3. Amalco can then distribute retained earnings to its shareholders by way of a capital dividend.


Typically Opco would only transfer the beneficial interest of the land/building to avoid unnecessarily triggering property transfer tax so this transaction must be structured carefully.


This type of capital gains planning was nearly shut down by the federal government in the summer of 2017 and the provincial government keeps threatening the subject transfers of beneficial interests to property transfer tax so this type of planning may not be around for much longer. Accordingly, taxpayers would be wise to trigger any capital gains within their companies sooner rather than later.


Need assistance or help in understanding if you are eligible for a reduced tax rate? Please contact Ryan for more information.