New Tax Rule Limits Dividend Received Deduction for Financial Institutions

Navigating the New Rule - Dividend Received Deduction by Financial Institutions

The Canadian government has introduced a new tax rule that will prevent financial institutions from claiming a dividends received deduction for shares that are mark-to-market properties.

This new rule is aimed at limiting the imposition of multiple levels of corporate tax and ensuring that the tax regime for mark-to-market properties is not compromised. In this article, we will discuss the impact of this new rule on financial institutions, the reasons behind its introduction, and its implications for the Canadian economy.

What is the Dividends Received Deduction?

A corporation can claim a dividends received deduction for dividends received on shares of other Canadian-resident corporations. The purpose of this deduction is to limit the imposition of multiple levels of corporate tax. By allowing corporations to deduct dividends received from their taxable income, the government is preventing the double taxation of corporate income.

What are Mark-to-Market Properties?

Mark-to-market properties are securities that are held for trading purposes. They are recorded on a company’s balance sheet at their current market value. Any gains or losses on these securities are recorded as ordinary income in the year they are incurred. This means that gains and losses on mark-to-market properties are treated differently than gains and losses on other types of securities.

Why is the New Rule Being Introduced?

The new rule preventing financial institutions from claiming a dividends received deduction for shares that are mark-to-market properties is being introduced because it conflicts with the tax regime for mark-to-market properties. The tax regime for mark-to-market properties is designed to ensure that all gains and losses on these securities are recorded as ordinary income. Allowing financial institutions to claim a dividends received deduction on these shares would undermine this tax regime and create a loophole for tax avoidance.

What is the Impact of the New Rule on Financial Institutions?

The new rule will have a significant impact on financial institutions that hold mark-to-market properties. Financial institutions will no longer be able to claim a dividends received deduction on these shares, which means that they will be subject to higher levels of corporate tax. This will reduce the profitability of financial institutions and could lead to a decline in the value of their shares.

What are the Implications of the New Rule for the Canadian Economy?

The implications of the new rule for the Canadian economy are uncertain. On the one hand, the new rule could reduce the tax revenue of the Canadian government, as financial institutions will no longer be able to claim a dividends received deduction on mark-to-market properties. On the other hand, the new rule could reduce the incentive for financial institutions to invest in mark-to-market properties, which could reduce the volatility of the Canadian stock market.

FAQs

  1. When will the new rule come into effect? The new rule will apply to dividends received after 2023.
  2. Will the new rule apply to all financial institutions? Yes, the new rule will apply to all financial institutions that hold mark-to-market properties.
  3. Will the new rule have a significant impact on the profitability of financial institutions? Yes, the new rule is likely to reduce the profitability of financial institutions that hold mark-to-market properties.