Purification is the right instinct before a sale. The size of the dividend that does it is not automatically safe just because the target moved.
Short answer
Not entirely, and not automatically. A dividend paid to move investments out ahead of a sale is only protected from the anti-stripping rule in section 55(2) up to the corporation’s safe income — “that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at fair market value, immediately before the dividend, of the share on which the dividend is received” — and any portion above that figure is recharacterized as a capital gain instead of a tax-free inter-corporate dividend.
Subsection 55(2) converts what would otherwise be a deductible inter-corporate dividend under section 112(1) into proceeds of disposition or a capital gain where the dividend exceeds the paying corporation’s safe income on hand. Where a stock dividend is used instead of cash, subsections 55(2.2) to (2.4) set its amount at the greater of the paid-up capital increase and the fair market value of the shares issued, and split it against safe income the same way.
The purification question is separate from, and sits alongside, a different consequence entirely: a target that carries its own investment portfolio can reduce the buyer’s small business deduction for years after closing through the passive-income grind in section 125(5.1), even where that portfolio never threatened the seller’s own exemption claim. Clearing the exemption test and clearing the buyer’s SBD exposure are two different numbers.
One file shows a purification dividend sized larger than the company’s safe income, with the excess coming back as a capital gain. A second sized a stock dividend to its paid-up capital increase on the assumption that the low figure would decide the result — it does not, fair market value can govern instead. A third shows the buyer-side consequence that purification does not solve.
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Canadian small-business transaction data is not published anywhere, so most valuations in this country quote an American benchmark. The Deavo–Treadstone Acquisition Index is a daily record of Canadian listings built to replace that: asking-price distributions by province and city are published now, and days on market, departure rates and asking-to-sale spreads follow as the series lengthens. Leave an email and we will tell you as each measure lands.
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