Tax Insights: Bill C-31 introduces rules to limit tax deferral using corporations with staggered year ends

Issue 2026-21

In brief

What happened? 

On May 6, 2026, the federal government tabled Bill C‑31, A second Act to implement certain provisions of the budget tabled in Parliament on November 4, 2025. Bill C‑31 includes amendments to the Income Tax Act (ITA) that are intended to limit a form of tax deferral achieved through the payment of certain inter‑corporate dividends in tiered corporate structures with staggered taxation year ends. The proposed rules are the third iteration of this measure, which was first announced in the 2025 federal budget and further revised in draft legislation released on January 29, 2026.

If enacted, these rules would apply to taxation years of a dividend‑paying private corporation (a “payer corporation”) that begin after November 3, 2025.

Why is it relevant?

The proposed rules could affect many Canadian private corporate groups, particularly those using a holding corporation. When the rules apply, a dividend refund that a payer corporation would otherwise claim on an intercompany dividend would be suspended and only released in a later year when, generally, the dividend flows out of the group to an individual or a non‑connected corporation.

Actions to consider

Private corporate groups should review their structures to determine whether any affiliated corporations have different taxation year ends, assess whether intercompany dividends paid in taxation years beginning after November 3, 2025 could be subject to the rules, and consider adjustments to dividend planning, year‑end alignment and transaction structuring.

In detail

Background

A Canadian private corporation pays a higher rate of corporate tax on its investment income (such as interest, rent or taxable capital gains on investments) than it does on business income. Part of that higher tax is refundable to the corporation when it pays a dividend, at a rate of 38.33% of the dividend (limited by the amount of refundable tax). The refundable tax mechanism aims to align the treatment of investment income earned through a corporation with investment income earned directly by an individual.

Timing differences are an inherent feature of the refundable tax regime. A corporation generally claims its refund at its tax balance‑due day for the year it pays a dividend, while the shareholder's tax on that dividend is payable by reference to the shareholder's own taxation year. This is the case whether the shareholder is an individual or a corporation.

When a private corporation pays a dividend to a connected corporation under the Part IV¹ regime, the payer corporation can generally claim its refund (or reduce its other tax payable for the year) at its tax balance‑due day, while the receiving corporation's matching Part IV tax is not payable until its own balance‑due day. Where the receiving corporation has a later taxation year end than the paying corporation, there can be a gap of up to a full year between receipt of the refund and payment of the matching Part IV tax. This timing outcome is a natural consequence of how the refundable tax system interacts with different taxation year ends, and for many corporate groups it reflects ordinary commercial structuring rather than deliberate tax planning. The federal government has nonetheless identified this timing gap as a policy concern, citing deferral planning (potentially indefinite) by some taxpayers using multi‑tier structures, and the proposed rules in Bill C‑31 are intended to address it.

The proposed rules

The proposed rules would operate in three main components.

Suspension of the dividend refund

A dividend paid by a payer corporation to an affiliated corporation with a later taxation year end would not generate a refund for the payer corporation right away. The refund would be suspended, unless the exception described below applies.

Exception when timely dividends flow out of the affiliated group

The suspension of the dividend refund would not apply where an amount equal to approximately 99.66% of the portion of the dividend that generated the dividend refund (calculated as the amount of the dividend refund multiplied by 2.6) flows out of the corporate group as dividends to an individual or non‑affiliated corporation before the payer corporation's tax balance‑due day. In this case, no significant deferral would be expected to have been achieved using the tiered corporate structure.

Later release of the suspended refund

If a dividend refund is suspended, it can be released to the payer corporation in a later year when sufficient dividends have been paid out of the corporate group. The test for whether a dividend has been paid out of the group for release purposes uses the Part IV tax concept of "connected" corporations, which is a broader concept than affiliation. This means that for release purposes, sufficient dividends must flow to individuals or corporations that are neither affiliated with, nor connected to, the payer corporation.

The overall effect is that a corporate group can continue to pay dividends within the group, but the refund generally only becomes available once the dividend reaches an individual or a corporation that was not affiliated with the payer corporation (and, once a refund has been suspended, that pays Part IV tax as a non-connected corporation). The timing of these tests can be nuanced, and there is additional complexity where a recipient corporation is affiliated but not connected.

Which corporations would be affected?

The proposed rules would be relevant when:

• two or more Canadian private corporations in a group are affiliated with each other (commonly a parent‑subsidiary relationship, but more generally including all corporations controlled alone or together by individuals who are spouses of each other)
• the affiliated corporations have different taxation year ends, and
• dividends are paid between the corporations

For example, the rules could arise when a holding corporation is used to hold investments or shares of an operating company, and the holding corporation and operating company have different year ends.

The rules should not apply to a standalone corporation with only an individual shareholder, or to a corporate group when all the corporations have the same taxation year end.

Situations where these rules may arise unexpectedly

The proposed rules can apply in situations that are not necessarily obvious. Below are two areas that warrant attention, as they can bring a corporate structure into scope for the proposed rules.

Different taxation year ends within a corporate group

Different taxation year ends can arise within a corporate group as follows:

• Different year ends from the start – Corporations in the same group may have been set up with different year ends for commercial or historical reasons.
• A year end that changes because of a corporate transaction – Certain transactions cause a corporation's taxation year to end earlier than expected. An amalgamation, for example, starts a new taxation year for the amalgamated corporation, and an acquisition of control ends a corporation's taxation year immediately before the acquisition.
• Trusts interposed between corporations – Additional complexity may arise when a trust is interposed between two corporations that share the same taxation year end (but not a calendar year end). The timing rules that apply to dividends flowing through a trust can raise questions about how the proposed rules apply in these structures, and they should be reviewed carefully.

Affiliation between corporations that may be overlooked

The proposed rules only apply when the payer and receiving corporations are "affiliated." Affiliation is a control‑based test that looks to the relationships among shareholders. It is different from the more familiar concept of "related" persons, and it applies on the basis of "control in fact" rather than only legal control. For purposes of these rules, spouses are affiliated with each other, but other related individuals (such as children or siblings) are not. Affiliation is often a factual question, and outside of the loss restriction and stop‑loss rules where it most commonly arises, it is not a concept that many corporate groups focus on. The proposed rules would require affiliation to be considered in a dividend context, which may not have previously been a focus for many taxpayers and advisers.

Buying or selling a private corporation

The proposed rules are relevant to mergers and acquisitions involving private corporations. A target corporation may have paid dividends that would be subject to the rules (if enacted) and may then have a suspended refund that has not yet been released. This should be factored into tax due diligence on a transaction.

Due diligence may need to extend beyond the target itself and up through the target's corporate chain, because the application of the rules depends on the year ends of affiliated corporations and on dividend flows through multiple tiers. In addition, because no limitation period applies to the suspension, the CRA could reassess at any time to deny a refund previously claimed on the basis that it should have been suspended, leaving a purchaser exposed to a liability from an otherwise statute‑barred year. This increases the importance of conducting historical due diligence and may necessitate careful consideration of ways to obtain protection for a purchaser.

The proposed rules should provide some relief for dividends arising as part of a sale transaction. Where the payer corporation is subject to a change of control within 30 days after paying the dividend, or within 12 months when the dividend was paid in contemplation of the change of control, the suspension does not apply. This permits certain pre‑closing dividends to be paid to prepare the target for sale.

Practical considerations

Corporate groups and their advisers should consider the following:

• Review the corporate structure – Identify which corporations in the group are affiliated with each other and whether they have different taxation year ends. Intercompany dividends between affiliated corporations with mismatched year ends are potential triggers for these rules.
• Consider dividend timing – Where the rules could apply, pay careful attention to when dividends are paid and how they move through the structure, so that dividends reach an individual or non‑affiliated corporation before the payer corporation's balance‑due day to avoid being suspended.
• Consider aligning taxation year ends – Aligning year ends across the group may be a practical way to avoid the rules. This is a significant decision with other tax and commercial consequences and should be reviewed with an adviser before acting.
• Track suspended refunds – If the rules are enacted and a suspension applies, carefully track the suspended refund so that it can be claimed when the dividend eventually reaches a party outside the group. New tracking schedules are likely to be required as part of the annual corporate tax filing, which is expected to add significant compliance complexity for affected corporate groups.
• Factor the rules into transaction planning – On a sale or reorganization, consider whether the rules apply and whether the change‑of‑control relief is available. Particular care is needed where a transaction is contemplated: a pre‑closing dividend paid too early (outside the 30‑day window, or outside the 12‑month window where the dividend is paid in contemplation of the change of control) could fall outside the relief and give rise to a permanently suspended refund. Therefore, timing and sequencing of dividends in the lead-up to a transaction require careful planning.

The takeaway

The proposed rules in Bill C‑31 would introduce a meaningful change to how private corporate groups interact with the dividend refund mechanism. The rules are complex, and even groups with relatively simple structures may find themselves affected if affiliated corporations have different taxation year ends. Although the rules have not yet been enacted, the proposals would apply retroactively to taxation years of the payer corporation beginning after November 3, 2025, so corporations should not wait for the rules to be enacted before considering their impact.

Private corporations, family‑owned groups and anyone contemplating a purchase or sale of a private corporation should take the time now to assess whether the proposed rules would apply, understand the potential impact, and identify planning steps that make sense. We can help you assess how these rules will affect your specific situation.