DFK Tax Digest – 2026 Issue Three

DFK Tax Digest – 2026 Issue Three

• Capital Gains Inclusion Rate: The Final Word – Long-time readers may remember our earlier article on the “Capital Dividend Election Trap,” which warned about the risks created by the Federal Government’s proposed increase to the capital gains inclusion rate (the portion of capital gains that are taxed) from 50% to 66.7%. After more than a year of uncertainty, that saga has finally come to an end — and it is worth revisiting what actually happened, and what it means going forward.
• Right-Sizing Paid-Up Capital to Access the Capital Dividend Account – One recurring issue in owner-managed estate planning is a corporation that has a substantial capital dividend account (CDA) often arising from life insurance proceeds received on the death of a shareholder but is unable to distribute that value to the estate on a tax-free basis. The issue may arise where the paid-up capital (PUC) of the shares being redeemed is sufficiently high that the redemption generates little or no deemed dividend to which a capital dividend election can apply. A recent CRA advance income tax ruling, 2025-1076711R3, confirms a longstanding planning technique: reducing the PUC before the redemption. The ruling also expressly connects the proposed transactions to an advance ruling from the 1980s, ATR-54. For practitioners advising on estate freezes and corporate-owned life insurance structures, the ruling provides further support for the continued viability of this approach.