Principal Issues: Would the CRA consider as valid notification in writing for the purposes of subsection 89(14) of the ITA, a directors' resolution of a subsidiary wholly-owned corporation declaring a dividend and containing a designation that such a dividend is an eligible dividend paid to its parent (a public corporation or a corporation controlled by a public corporation)?
Position: Yes, provided that the directors' resolution is delivered to the parent on a timely basis. In circumstances where the Boards of Directors of the subsidiary and the parent are the same, the CRA would normally consider the directors' resolution as being effectively delivered to the parent upon signature.
Reasons: It is our view that this position is consistent with the position adopted in respect of valid methods of notification for non-public corporations, wherein such a corporation can notify their shareholders of an eligible dividend by way of a notation in the corporate Minutes, where all of the shareholders are directors of the corporation. Furthermore, we feel that this position is reasonable considering the powers and duties of directors and their significant role in the corporate and business context. Finally, we believe that this position is in accordance with the tax policy objectives underlying subsection 89(14) and that it provides an appropriate balance between the entitlement of dividend recipients to certainty with respect to the tax consequences of corporate distributions and the administrative burdens of the notification requirements as experienced by dividend payers.
Tax Executive Institute/CRA Liaison Meeting
December 8, 2009
Question 3 Eligible Dividend Designations
Subsection 89(14) states that "a corporation designates a dividend it pays at any time to be an eligible dividend by notifying in writing at that time each person or partnership to whom it pays all or any part of the dividend that the dividend is an eligible dividend." The written and contemporaneous designation requirement in subsection 89(14) ensures the certainty of the tax treatment of the distribution to the recipients, but imposes an administrative burden on dividend payers. To reduce the burden on public corporations with large numbers of corporate entities within the group, the Canada Revenue Agency ("CRA") has adopted an administrative position in respect of the designation requirement that affords relief in certain situations.
Where a wholly-owned subsidiary of a corporation pays a dividend to its parent (a public corporation or a corporation controlled by a public corporation), would CRA accept as a written and contemporaneous designation a dividend resolution that is signed by the officers of the subsidiary? In many instances, the officers of the paying corporation are the same as the officers of the receiving corporation and thus the tax policy objective of affording certainty to the recipient will be satisfied. Adopting TEI's recommendation would reduce compliance costs for public companies with large numbers of corporate entities within the group. We invite CRA's response.
Our Comments
First of all, we reiterate our position as set out in our documents no. 2007-0249941E5 and 2008-0300381C6, wherein we opine that the need to provide taxpayers with certainty regarding the tax consequences associated with corporate distributions is the main tax policy objective underlying the legislation of a written and contemporaneous designation requirement in subsection 89(14).
In the latter document we also discuss our position regarding the administrative relief extended solely to public corporations with respect to the designation requirements in subsection 89(14), for 2007 and subsequent taxation years. We opine that the administrative relief for public corporations will, among other things, reduce the potential burden associated with providing written and contemporaneous notification to hundreds or even thousands of shareholders. In addition, we further specify that this administrative relief will not impact the need for taxpayer certainty in light of the practical application of the eligible dividend rules for public corporations.
On December 20, 2006, we issued a News Release titled "Designation of Eligible Dividends" (Document 2006-0217891Z0), wherein we outlined general guidelines for corporations for purposes of the designation requirements.
In this news release, we stated our intention to provide public corporations with administrative relief from the statutory designation requirements in subsection 89(14), as well as provided clarification to all other corporations, other than public corporations, in respect of notification requirements and examples of acceptable methods of notification. On the latter point, we stated, among other things, the following:
For 2007 and subsequent taxation years, for all corporations other than public corporations, the notification requirements of proposed subsection 89(14) must be met each time a dividend is paid. Examples of notification could include identifying eligible dividends through letters to shareholders and dividend cheque stubs, or where all of the shareholders are Directors of a corporation, a notation in the Minutes. [emphasis added]
In particular, we note that we have allowed corporations, other than public corporations, to notify their shareholders of an eligible dividend designation by way of a notation in the Minutes, where all of the shareholders are the directors of the corporation. Our position is based on the fact that, for practical purposes, non-public corporations will generally have fewer shareholders than public corporations, and such shareholders may often have a seat on the corporation's Board of Directors in order to take part in the internal management of the corporation. Thus, where all of the shareholders are also directors of the corporation, we consider that a directors' resolution declaring a dividend and containing a designation that such dividend is an eligible dividend constitutes valid notification in writing for the purposes of subsection 89(14). In these circumstances, such resolution provides certainty to the taxpayers receiving the dividends with respect to the tax consequences of the corporate distributions.
In the context of a subsidiary wholly-owned corporation that pays a dividend to its parent (a public corporation or a corporation controlled by a public corporation), the CRA would accept that a directors' resolution of the subsidiary declaring a dividend and containing a designation that such a dividend is an eligible dividend, would constitute a valid notification in writing for the purposes of subsection 89(14), provided that the directors' resolution of the subsidiary is delivered to the parent on a timely basis. In circumstances where the Boards of Directors of the subsidiary and the parent are the same, the CRA would normally consider the directors' resolution as being effectively delivered to the parent upon signature.
It is our view that this position is consistent with the position adopted in respect of valid methods of notification for non-public corporations as previously described. Furthermore, we feel that this position is reasonable considering the powers and duties of directors and their significant role in the corporate and business context. Finally, we believe that this position is in accordance with the tax policy objectives underlying subsection 89(14) and that it provides an appropriate balance between the entitlement of dividend recipients to certainty with respect to the tax consequences of corporate distributions and the administrative burdens of the notification requirements as experienced by dividend payers.