A deemed dividend under section 84 of the Income Tax Act is an amount that the Act treats as a dividend, and therefore as taxable in the shareholder's hands, even though it may not take the legal form of a dividend. The provision converts certain distributions and capital transactions into dividend income to prevent corporate surplus from being extracted on a more favourable basis.
- Subsection 84(1) deems a dividend where a corporation increases the paid-up capital of its shares without adequate corresponding consideration.
- Subsection 84(2) deems a dividend on certain distributions made on a wind-up, discontinuance, or reorganization of a business.
- Subsection 84(3) deems a dividend where a corporation redeems, acquires, or cancels its shares for more than their paid-up capital.
These rules are central to redemptions, wind-ups, and pipeline planning, where the line between a capital repayment and a dividend determines the tax result.