Possible Anomaly in the Passive Income SBD Grind?
Owner-managers can potentially avoid the passive income SBD grind in
paragraph 125(5.1)(b) when triggering corporate capital gains by winding
up and dissolving the corporation holding the investments in the same
Consider a Holdco that wholly owns an Opco that claims the SBD annually.
Both companies have a December 31 year-end. Holdco owns investments
with an accrued capital gain of $1 million. In year 1, Holdco sells the
investments and realizes a capital gain. As a result, in year 2, Opco
loses the SBD entirely since an associated corporation (Holdco) has
investment income above $150,000 in the preceding year. This is
presumably the expected operation of these rules as envisioned by the
Suppose that in addition to owning Opco, Holdco also owns a second
wholly owned subsidiary, Realestateco, which holds land with an accrued
capital gain of $1 million. All three companies (Holdco, Opco, and
Realestateco) have a December 31 year-end. In year 1, Realestateco
disposes of the land and realizes a capital gain. Before the end of that
year, Realestateco is wound up and legally dissolved.
In year 1, Opco and Realestateco are associated; however, Opco's SBD for
year 1 should be preserved since there was no investment income prior
to year 1 in the associated group. In year 2, Opco calculates its
passive income SBD grind by adding up the year 1 investment income of
corporations that it is associated with in year 2. In year 2, Opco and
Realestateco are not associated since Realestateco was dissolved before
the start of year 2. Even though Realestateco had a sizable capital gain
in year 1, it is not considered for Opco's SBD grind.
The above result may appear anomalous in view of the policy purpose of
the passive income SBD grind, as illustrated by example 1. Still, none
of the specific anti-avoidance rules appear to deal with this situation.
The Budget Implementation Act, 2018, No. 1 contains an anti-avoidance
rule that targets circumstances where a short taxation year is triggered
to defer the application of these rules, but this applies only for 2018
transactions. There are also two deemed association rules, neither of
which should apply because Realestateco no longer exists:
(1) subsection 125(5.2) deems two corporations that are related—but
otherwise not associated—to be associated if a loan or transfer was made
between them to avoid association and thereby avoid the SBD grind; and
(2) subsection 256(2.1) deals with the separate existence of companies
to avoid association.
A taxpayer could easily have performed all of the above steps without
any view to a tax advantage; the windup of a real estate holding
corporation after the sale of the underlying real estate was a common
transaction before these rules existed (although a windup in the same
year may have been unusual). However, it is also possible to plan into
this situation. For instance, it may be possible to preserve the SBD
while deliberately triggering capital gains to access corporate funds at
the integrated capital gains tax rate, as in example 3 below.
Consider example 1, in which the investments are in Holdco, except that
(1) before triggering the capital gain in year 1, Holdco transfers the
investments to a newly formed corporation (CGco) on a tax-deferred basis
under subsection 85(1); and (2) before the end of year 1, CGco is wound
up and legally dissolved with any CDA and RDTOH consolidated into
By the same analysis as in example 2, CGco's capital gain is not
considered for Opco's passive income SBD grind. Of course, this
situation may be thought of as deliberately seeking a tax advantage, and
hence GAAR must be considered.
Martin Lee and Thanusan Raveendran
LRK Tax LLP