Budget 2024: Synthetic Equity Arrangement Restrictions Tightened

The Income Tax Act (Canada) (the "Tax Act") generally permits a corporation to deduct the amount of a dividend received from another corporation resident in Canada when computing its taxable income, subject to certain limitations (a "Dividend Received Deduction").

Among the applicable limitations, the Tax Act contains certain specific anti-avoidance rules that preclude a corporation from claiming a Dividend Received Deduction where the dividend arises as part of a "synthetic equity arrangement". Synthetic equity arrangements include arrangements that involve share transactions where all or substantially all of the risk of loss or opportunity for gain or profit in respect of the shares are retained by the transferor (the Canada Revenue Agency typically interprets the phrase "all or substantially all" to represent 90% or more of a particular amount.). Under a classical synthetic equity arrangement in respect of a share, a taxable Canadian corporation enters into a