Principal Issues: In a situation where 1) CorpB is beneficially interested in a personal trust (Trust) 2) Trust has de jure control of CorpA 3) CorpA is connected to CorpB 4) CorpA pays a taxable dividend to Trust and 5) Trust makes the designation under subsection 104(19) in respect of CorpB; when CorpA completes part 3 of schedule 3, should the dividend CorpA paid to Trust be reported in column D "Taxable dividends paid to connected corporations" or in the total on line 450 for total taxable dividends paid in the taxation year to other than connected corporations?
Position: The dividend CorpA paid to Trust should be reported on line 450 for total taxable dividends paid in the taxation year to other than connected corporations, even if Trust designates the dividend in respect of its beneficiary (CorpB), pursuant to subsection 104(19).
Reasons: The law and part 3 of schedule 3
XXXXXXXXXX Marc LeBlond 2011-039266
May 2, 2011
Dear Madam,
Subject: Question regarding Schedule 3 to the T2
This is in response to your email of January 12, 2011 in which you have asked for our comments on the above subject respecting the situation described below.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
It appears to us that the situation described in your email and summarized below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for their opinion. However, we are able to offer the following general comments that may be helpful to you. It should be noted that the application of one or more provisions of the Act generally requires the analysis of all facts relating to a particular situation. Accordingly, and in light of the fact that your letter only briefly describes a particular hypothetical situation, our comments below may not be fully applicable in a particular situation.
The Situation
- Corporation A and Corporation B are "private corporations" as defined in subsection 89(1) and "Canadian-controlled private corporations" as defined in subsection 125(7). The "fiscal period", as defined in subsection 249.1(1), of Corporation A and Corporation B ends on September 30 and December 31, respectively.
- Corporation B is "beneficially interested", as defined in subsection 248(25), applied without regard to its subclauses (b)(ii)(A)(I) to (IV), in a "personal trust" ("Trust") as defined in subsection 248(1). By virtue of paragraph 251(1)(b), Corporation B and Trust are deemed to not be dealing at arm's length. Corporation B is not a trustee of Trust.
- Trust, which is resident in Canada, controls Corporation A through holding more than 50% of the issued shares of the capital stock of Corporation A (with full voting rights under all circumstances). Corporation A is "Connected", as defined in subsection 186(4), with Corporation B since Corporation B controls Company A within the meaning of subsection 186(2), given that Trust controls Corporation A, and Trust and Corporation B do not deal at arm's length.
- At the end of Fiscal Year 2010, Corporation A paid a taxable dividend to Trust.
- Corporation A claimed on its income tax return (the "T2") for its 2010 taxation year a "dividend refund" ("DR"), as defined in subsection 129(1), in respect of the taxable dividend paid to Trust during that year.
- In its income tax return for its 2010 taxation year, Trust designated to Corporation B pursuant to subsection 104(19) the taxable dividend it received from Corporation A in that year. Consequently, for the purposes of paragraphs 82(1)(b) and 107(1)(c) and (d) and section 112, the dividend was deemed not to have been received by Trust and, for the purposes of the Act, except Part XIII, constituted a taxable dividend received from Corporation A by Corporation B (the "Deemed Dividend") during its 2010 taxation year.
- Corporation B completed Schedule 3 "Dividends Received, Taxable Dividends Paid and Part IV Tax Calculations", attached to its T2 for its 2010 taxation year, to determine its Part IV tax payable in respect of the Deemed Dividend. Specifically, in Section 1 "Dividends received in the tax year" of Schedule 3, Corporation B reported, in particular, the Deemed Dividend in column G "Total taxable dividends paid by connected payer corporation" and the CR for Corporation A in column H "Dividend refund of the connected payer corporation".
Your Position and Your Question
Section 3 of Schedule 3 to T2 for a particular taxation year requires a corporation to report, among other information, in column D "Taxable dividends paid to connected corporations" (line 430), the taxable dividends amounts that it has paid that year to corporations to which it is connected and, on line 450, the total taxable dividends it paid in that year to persons other than corporations to which it is connected.
You asked, in the situation you submitted to us, whether Corporation A should report the dividend it paid to Trust at the end of its 2010 Fiscal Period in column D or in the total on line 450 of Section 3 of Schedule 3 to its T2 for its 2010 taxation year.
Our Comments
The Canada Revenue Agency generally expects a corporation paying a dividend (the "Payer Corporation") to a trust to report the dividend in the total in line 450 of Section 3 of Schedule 3 to its T2 for the taxation year in which the dividend is paid, even if the trust designated such dividend, pursuant to subsection 104(19), to one of its corporate beneficiaries to which the Payer Corporation is Connected.
We hope that our comments will be of assistance and thank you for submitting this question to our attention.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industry Section
Corporate Reorganizations and Resource Industry Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch