Budget 2015: New Rules Target "Synthetic Equity Arrangements"

Budget 2015 contains specific proposals targeted to counteract what the Government characterizes as the inappropriate use of so-called "synthetic equity arrangements" to generate tax losses.

Background

Under the Income Tax Act (Canada) (the "Tax Act"), a corporation can, subject to certain exceptions, generally deduct an amount equal to the amount of a taxable dividend it receives in respect of a share of a Canadian corporation (the "Dividend Deduction"). The Dividend Deduction is intended to prevent the imposition of multiple levels of Canadian corporate tax on earnings distributed from one corporation to another.

An important exception to the availability of the Dividend Deduction is contained in special rules contained in the Tax Act governing so-called "dividend rental arrangements" (the "DRA Rules"). Under the DRA Rules, the Dividend Deduction is denied in respect of arrangements where the main reason for such an arrangement is to enable the shareholder