During the year, Canco, a Canadian controlled private corporation, paid three separate dividends of $30,000 each to its three shareholders on separate classes of shares and, upon payment, designates each dividend under s. 89(14) as an eligible dividend pursuant to subsection 89(14). The general rate income pool at the end of the year is $60,000, so that Canco is considered to have made an excessive eligible dividend designation (“EEDD”), as defined in s. 89(1), of $10,000 in respect of each eligible dividend paid.
Is it possible for the s.185.1(2) election to deem the entire amount of one of the eligible dividends paid in the year to be an ordinary taxable dividend, so that one shareholder receives a $30,000 ordinary taxable dividend and the other two each receive a $30,000 eligible dividend? If no, would the corporation be obliged to file three separate (rather than a single) election under s. 185.1(2), or could the corporation file one election for all dividends? Would the answer change (in “scenario #2”) if two of the three $30,000 dividends arose as deemed dividends on share redemptions?
CRA responded:
The election available in subsection 185.1(2) is made in respect of each EEDD that is made in respect of each eligible dividend paid by Canco in the year. … [T]he original eligible dividend paid by Canco and received by a shareholder may be reduced by an elected amount up to the EEDD in respect of the dividend. This upper limit is stated in subparagraph 185.1(2)(a)(ii). Therefore, in scenario#1, Canco can reduce the $30,000 original eligible dividend paid on the Class A shares by a maximum of $10,000 by electing on the full amount of the EEDD in respect of that dividend. … It is not possible to elect on the full amount of the $30,000 eligible dividend paid to the Class A shareholder under subsection 185.1(2) to reduce the eligible dividend amount to nil. …
The fact that two of the eligible dividends paid in scenario #2 are deemed taxable dividends resulting from share redemptions, pursuant to subsection 84(3), does not change the answer above.
CRA has published the prescribed manner… .
While the election must be made in respect of each EEDD on each eligible dividend, these elections can be combined into one letter to your tax centre… .