Canada proposes preferred-share tax exemption for private companies

The Notice of Ways and Means Motion proposes amendments to sections 191 and 191.1 of the Income Tax Act; they are not yet enacted. Part VI.1 is an issuer-level tax aimed at after-tax financing through shares with debt-like characteristics. Under the current rules, taxable Canadian corporations may pay tax at 40% on relevant short-term preferred-share dividends, while other taxable preferred-share dividends can attract 40% or 25% depending on whether the statutory election has been made. The calculation applies only after the available dividend allowance and excludes specified dividends.^[2][3][5]

Excluding dividends paid by CCPCs

The draft would add a Canadian-controlled private corporation to paragraph (b) of the ‘excluded dividend’ definition in section 191(1). Dividends paid while the issuer is a CCPC would therefore fall outside the Part VI.1 calculation. The amendment would apply to dividends paid on or after Budget Day, 5 November 2026, if the legislation is enacted as drafted. It does not exempt a dividend merely because its recipient is a CCPC; the proposal looks to the status of the corporation paying it.^[3][4]

Larger allowance for other issuers

For other issuers, the draft would increase the section 191.1 dividend allowance from C$500,000 to C$1.5 million. It would also raise from C$1 million to C$3 million the prior-calendar-year dividend threshold that reduces the allowance. The same figures would govern the total allowance shared among associated taxable Canadian corporations. These threshold changes would apply to taxation years ending after 2026.^[2][3][5]

The proposal may reduce financing costs for private-company preferred-share structures and lessen Part VI.1 exposure for public or other taxable Canadian issuers within the enlarged allowance. Groups should distinguish the proposed CCPC dividend-date rule from the later taxation-year rule for the thresholds, confirm issuer status when each dividend is paid, and aggregate relevant dividends across associated corporations. Existing associated-group allocation mechanics remain relevant.^[3][5]

Model the proposal separately

No new return or payment deadline is proposed. Until Parliament enacts the amendments, issuers should preserve their current Part VI.1 computations while separately modelling the draft relief. Finance is also reviewing the broader preferred-share regime and accepts submissions until 8 January 2027; that is a consultation deadline, not a tax-filing deadline.^[2][3]