Bill C‑31: New Rules to Curb Tax Deferral in Corporations With Different Year Ends — Explained

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Overview

The federal government’s Bill C‑31 proposes changes to the Income Tax Act aimed at stopping certain tax‑deferral strategies used by private corporations that have staggered (non‑aligned) taxation year ends. These rules target situations where intercompany dividends allow one corporation to receive a dividend refund long before the related tax becomes payable by another corporation in the group.

If passed, the rules would apply to any taxation year of a dividend‑paying private corporation that begins after November 3, 2025.

Why This Matters

Many Canadian private corporate groups—especially those using holding companies—could be affected. Under the new rules, a corporation that pays a dividend to an affiliated corporation with a later year end may have its dividend refund temporarily suspended. The refund would only be released once the dividend effectively leaves the corporate group and reaches an individual or a non‑connected corporation.

This could significantly change how groups plan dividends, manage year ends, and structure transactions.

Key Concepts

1. Background: How Refundable Tax Works Today

• Private corporations pay higher tax on investment income.

• Part of this tax is refundable when the corporation pays dividends.

• Timing differences arise because:

  • The payer corporation claims its refund at its own balance‑due date.

  • The receiving shareholder (individual or corporation) pays tax based on their own year end.

• When dividends move between corporations with different year ends, the payer may get a refund months before the recipient pays the matching Part IV tax.

The government views this timing gap as a potential tax‑deferral loophole.

2. What Bill C‑31 Proposes

The new rules have three main components:

A. Dividend Refund Suspension

If a corporation pays a dividend to an affiliated corporation with a later year end, the payer’s dividend refund is not available immediately.

B. Exception: When Dividends Flow Out Quickly

The refund is not suspended if nearly all of the dividend (roughly 99.66% of the amount tied to the refund) is paid out of the group to:

• an individual, or

• a non‑affiliated corporation

before the payer’s balance‑due date.

C. Releasing the Suspended Refund

A suspended refund becomes available only when enough dividends have flowed to parties outside the affiliated/connected group. This uses the broader “connected corporation” test from Part IV, not just affiliation.

3. Who Is Affected?

The rules apply when:

• Two or more private corporations are affiliated (often parent–subsidiary or spouses controlling separate corporations).

• They have different taxation year ends.

• Dividends are paid between them.

They do not apply to:

• A standalone corporation owned by an individual.

• Groups where all corporations share the same year end.

4. Situations Where the Rules May Apply Unexpectedly

A. Different Year Ends Can Arise Easily

• Corporations may have been set up with different year ends for historical or commercial reasons.

• Mergers, acquisitions of control, or amalgamations can trigger unexpected year‑end changes.

• Trusts between corporations can complicate timing and create mismatches.

B. Affiliation May Be Overlooked

• Affiliation is based on control (including “control in fact”), not just legal ownership.

• Spouses are affiliated; children and siblings are not.

• Many groups don’t normally analyze affiliation unless dealing with loss‑restriction rules.

5. Impact on Buying or Selling a Private Corporation

• A target corporation may have suspended refunds that haven’t yet been released.

• Buyers may inherit exposure if the CRA later reassesses a previously claimed refund.

• Due diligence must look up the chain at affiliated corporations’ year ends and dividend flows.

• Relief exists for dividends paid shortly before a change of control (within 30 days, or within 12 months if paid in contemplation of the sale).

6. Practical Steps for Corporate Groups

• Review your structure: Identify affiliated corporations and check for mismatched year ends.

• Plan dividend timing carefully: Ensure dividends reach individuals or non‑affiliated corporations before the payer’s balance‑due date if you want to avoid suspension.

• Consider aligning year ends: This may eliminate the issue but has other tax and business implications.

• Track suspended refunds: New tracking will likely be required for tax filings.

• In transactions: Evaluate whether the rules apply and whether change‑of‑control relief is available.

Bottom Line

Bill C‑31 introduces significant changes to how private corporate groups can use the dividend refund system. Even simple structures may be affected if affiliated corporations have different year ends. Because the rules apply retroactively to years beginning after November 3, 2025, groups should begin assessing their exposure now rather than waiting for the legislation to pass.

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