New Proposed Tax Changes to Certain Surplus Stripping Transactions May Require Swift Action

By McGovern Hurley

With the recent introduction of new proposed tax measures in the federal budget, we wish to draw your attention to significant changes impacting the planning opportunities surrounding certain surplus-stripping transactions. A surplus stripping transaction generally involves extracting money from a corporation in the form of capital gains (taxed at approximately 27%, assuming the highest marginal rate), providing a tax-efficient alternative to the traditional dividend method of payment (taxed approximately between 39% to 48%, assuming the highest marginal rates).

Proposed New Changes:

The most recent Federal Budget proposed to broaden the scope of General Anti-Avoidance Rules (“GAAR”) to include transactions lacking “economic substance.” The new GAAR will apply to transactions occurring on and after January 1, 2024.

The Department of Finance referenced certain surplus-stripping transactions as lacking “economic substance,” indicating the likely application of GAAR. A detailed review of the new proposed rules must be considered if you have been contemplating a surplus stripping transaction.

Is a Surplus Stripping Transaction Right for You?

A surplus strip may be suitable if you own a corporation with substantial retained earnings and immediately need to withdraw cash (e.g., for a large purchase).

In conclusion, while surplus-stripping strategies offer significant tax savings, potential legislative changes emphasize the need for swift action and careful review. Act now to discuss the impact of these new rule changes proposed to take effect on January 1, 2024.


If you have any questions, the team here at McGovern Hurley LLP is always here to help.

John Mendis, Tax Advisory and Compliance Partner,

Greg Furyk, Business Advisory and Compliance Partner,