Revisions to Section 55 of the Income Tax Act (“ITA”) may prevent the tax-free payment of inter-corporate dividends within a related corporate group.
With the exception of Part IV tax where applicable, the related party exemption per S55(3)(a) will no longer be available to allow cash dividends say paid from Opco to Holdco unless there is safe income in the payor corporation at the time of the dividend payment.
A broader “purpose test” in section 55 will convert the cash dividend to a capital gain if there is insufficient post-71 tax retained earnings or what is generally called ‘safe income”. Many practitioners are concerned in that old files of tax returns and statements are not available to determine what the safe income is at the particular time. For the most part, retained earnings may be representative of safe income however in certain situations, it will not be such as fast write off of depreciable assets for tax purposes as opposed to a slower rate for accounting, safe income will be lower that retained earnings.
One may make the S55(5)(f) “designation” with the T2 to minimize the risk of the conversion to a capital gain.
Another option would be to freeze the OPCO shares and redeem over time the new special shares. In this regard, an inter-corporate share redemption is exempt under the S55(3)(a) related party exemption, so the safe income at the time of the freeze which is moved as part of the share exchange from the existing common shares to the new special shares, even though it may not be accurately determinable, does not cause a problem. The new common shares issued after the freeze would attract post-freeze safe income to which one may track going forward.
Purification techniques utilized in the past to retain the QSBC status for the capital gains exemption may no longer work under the new S55 rules. For example,sprinkling special shares were generally issued to a sister holding company to move discretionary cash dividends. Such dividends were generally exempt under Part IV due to the S186(2) connected corporation rules but also exempt under S55 due to the related party exemption. As these shares never had any safe income attributable to them and payment of dividends would reduce the value of the common shares or what is defined in the legislation as a reduction in the fair market value “of any share”, the dividend payment would likely result in a capital gain to the sister Holdco. As their redemption value was always a nominal amount (generally their nominal issue price), their redemption would not move any dollars to the sister Holdco.
In his regard, new methods for purification need to be implemented to insure one does not fall into the S55 taxation issues and to retain the QSBC status of cash rich operating companies that wish to retain their QSBC status.

On August 4, 2016, the IRS released Notice 2016-48 outlining the renewal procedures pertaining to the implementation of the changes to the ITIN process as required by the PATH ACT, passed in December 2015.  There were also changes to requirements for dependents.

Only ITIN holders who need to file a tax return may need to renew. Others with ITINs for information returns or say for certain IRS waiver forms used for a reduction or waiver in withholding tax, do not have to renew. Note that most of these waiver forms require a 3-year resubmission to the payor of the particular income to which the tax withholding waiver relates.

ITINS issued after 2012

The new law will invalidate an ITIN issued to a taxpayer if a federal tax return has not been filed at least once in the last three years unless renewed by the taxpayer. This means, ITINS issued after 2012 and not used for tax returns in either 2013, 2014, or 2015 will expire as of January 1, 2017. The renewal period starts on October 1, 2016.

If you have been filing tax return annually, such as Canadian filing U.S. 1040X returns reporting their net rental income from U.S. real estate, the ITIN does not have to be renewed. However, say you have an ITIN issued to you when you acquired the U.S. condo but never filed a return because there was no rental or you sold the condo but then acquired a new property 4 years later, you will then need to reapply for a new ITIN.

ITINS issued before 2013

ITINs issued before 2013 that have been used in filing a tax return, regardless if you filed a return for any taxation year, the ITIN will have to be renewed this October. The first ITINs that will expire are those with middle digits 78 and 79. The IRS will mail letters to this group informing them of the renewal process. The schedule for expiration of ITINs that do not have middle digits of 78 and 79 will be announced at a future date.

Dependents from countries other than Canada or Mexico

Beginning October 1, 2016, the IRS will not accept passports for dependents that do not have a date of entry into the U.S., as a stand-alone identification document or dependents of military members overseas.

Affected applicants will have to submit either U.S. medical records for dependents under age six or U.S. school records for dependents under age 18 along with the passport. Dependents over age 18 can submit a rental or bank statement or a utility bill listing the applicant’s name and U.S. address, with their passport.

Contact your professional advisor prior to implementing any of the outlined strategies.

Internal Revenue Service Circular 230 Disclosure
Pursuant to Internal Revenue Service Circular 230, we hereby inform you that the advice or information set forth herein with respect to U.S. federal tax issues was not intended or written to be used, and cannot be used, by you or any taxpayer, for the purpose of avoiding any penalties that may be imposed on you or any other person under the Internal Revenue Code.