Principal Issues: (1) In a given situation, where two corporate shareholders (ABCco and DEFco) own equally a third corporation (SRco), the total amount of SRco's variable A of the 2006 GRIP Addition, per subsection 89(7) , is $504,000; in 2002, SRco paid a $400,000 taxable dividend to ABCco, and in 2004, a $400,000 taxable dividend to DEFco, whether the amount under paragraph c) of variable A for each of ABCco and DEFco should be $252,000. (2) In another given situation, where two sister corporations (ABCco and DEFco) are connected to each other, the total amount of ABCco's variable A of the 2006 GRIP Addition is $504,000; in 2002, shares of ABCco owned by DEFco and shares of DEFco owned by ABCco are cross redeemed resulting in two $800,000 taxable dividends, whether the amount of the 2006 GRIP Addition for ABCco and DEFco should be $208,000 and $0, respectively.
Position: (1) Yes. (2)
Reasons: (1) The amount of $504,000 should be apportioned between ABCco and DEFco proportionately to the dividends they received from SRco between 2001 and 2005. (2) ABCco's and DEFco's 2006 GRIP Addition should be $504,000 and $0, respectively as demonstrated in Tables 1 and 2 in this document.
XXXXXXXXXX Marc LeBlond 2007-026300 May 26, 2008
Dear Sir,
Subject: Request for Technical Interpretation - Subsection 89(7)
This is in response to your email of December 17, 2007 in which you asked us for our comments on the above subject in relation to the situations described below.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
It appears to us that the situations described in your letter and summarized below could constitute actual situations 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 completed transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments that may be of assistance. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all the facts relating to a particular situation. As a result, and given that your letter only briefly describes four hypothetical situations, the comments we make below may not apply in full in a given particular situation.
First particular situation
- Parent corporation holds 100% of the shares of a corporation ("Subsidiary"). At all relevant times, Parent and Subsidiary are "taxable Canadian corporations", as defined in subsection 89(1), and "Canadian-controlled private corporations", as defined in subsection 125(7), whose "fiscal period", as defined in subsection 249.1(1), ends on December 31. At all relevant times, Subsidiary is a "connected corporation", as defined in subsection 186(4), to Parent.
- During each of the years 2001 to 2005, Subsidiary had "full rate taxable income" ("FRTI"), as defined in subsection 123.4(1), of $160,000. For the purposes of calculating paragraphs (a) and (b) of the description of A in the formula for the "general rate income pool addition for 2006" ("GRIP addition for 2006"), as defined in subsection 89(7), the total of the amounts referred to in paragraphs (a) and (b) of the description of A in that formula for the period 2001 to 2005 for Subsidiary is $504,000.
- In 2002, Parent received a taxable dividend of $800,000 from Subsidiary that was deductible pursuant to subsection 112(1). During the period 2001 to 2005, Parent received no other income and did not pay a dividend.
Your question and your position in relation to the first particular situation
You asked us to confirm that, in the first particular situation, the amount of the GRIP addition for 2006 for Parent would be $504,000 since, for purposes of computing paragraph (c) of A of the formula for the GRIP addition for 2006, it would be reasonable to consider that $504,000 of the $800,000 dividend received by Parent from Subsidiary in its 2002 taxation year is attributable to an amount described in A of the formula for the GRIP addition for 2006 in respect of Subsidiary.
Our comments on the first situation
We agree with you that in the first particular situation, the amount of the Parent's GRIP addition for 2006 would be $504,000.
Second particular situation
- ABCco and DEFco hold equal shares in a corporation ("SRco"). At all relevant times, ABCco, DEFco and SRco are "taxable Canadian corporations", as defined in subsection 89(1), and "Canadian-controlled private corporations", as defined in subsection 125(7), whose "fiscal period", as defined in subsection 249.1(1), ends on December 31. SRco is a "connected corporation", as defined in subsection 186(4), to ABCco and DEFco at all relevant times.
- In each of the years 2001 to 2005, SRco had a FRTI of $160,000. For the purposes of calculating paragraphs (a) and (b) of the description of A in the formula for the GRIP addition for 2006, the total of the amounts referred to in paragraphs (a) and (b) of the description of A in that formula for the period 2001 to 2005 for SRco was $504,000.
- In 2002, ABCco received a taxable dividend of $400,000 from SRco that was deductible pursuant to subsection 112(1). In the year 2004, DEFco received a taxable dividend of $400,000 from SRco, deductible pursuant to subsection 112(1). During the period 2001 to 2005, ABCco and DEFco earned no income other than the $400,000 dividend and did not pay any dividends.
Your question and your position on the second particular situation
You asked us to confirm that, in the second particular situation, the amount of the GRIP addition for 2006 for each of ABCco and DEFco would be $252,000 since it would be reasonable to consider, in this situation, that $252,000 of the dividend that each of ABCco and DEFco received from SRco in its 2002 and 2004 taxation years, respectively, would be attributable to an amount described in A of the formula for calculating the GRIP addition for 2006 in respect of SRco.
Our comments on the second situation
We agree with you that in the second particular situation, the amount of the GRIP addition for 2006 for each of ABCco and DEFco would be $252,000.
Third particular situation
- At all relevant times, ABCco and DEFco are "taxable Canadian corporations", as defined in subsection 89(1), and "Canadian-controlled private corporations", as defined in subsection 125(7), with a "fiscal period", as defined in subsection 249.1(1), ending on December 31. ABCco and DEFco are "connected corporations", as defined in subsection 186(4), to each other at all relevant times.
- During each of the years 2001 to 2005, ABCco had a FRTI of $160,000. For the purposes of calculating paragraphs (a) and (b) of the description of A in the formula for the GRIP addition for 2006, the total of the amounts referred to in paragraphs (a) and (b) of the description of A in that formula for the period 2001 to 2005 for ABCco is $504,000.
- In 2002, in connection with cross share redemptions, DEFco received a taxable dividend of $800,000 from ABCco, deductible pursuant to subsection 112(1) and ABCco received a taxable dividend of $800,000 from DEFco, deductible pursuant to subsection 112(1). The $800,000 taxable dividend received by DEFco was the only income earned by DEFco for its 2001 to 2005 years. No other dividends were paid by ABCco or DEFco during this period.
Your question and your position on the third particular situation
You asked us to confirm that, in the third particular situation, the amount of the GRIP addition for 2006 for ABCco and DEFco would be $208,000 and $0, respectively.
We understand that you wish to emphasize in the third situation that cross purchases or cross redemptions of shares between sister corporations result in successive calculations to determine each sister corporation's GRIP addition for 2006.
You submitted that, in the particular situation, "... it would be contrary to tax policy for an amount greater than $504,000 to flow between corporations as a dividend that can reasonably be considered to be derived from full rate income. On the other hand, ... $504,000 has flowed between corporations and should not, consequently, be lost in its entirety".
Our comments on the third situation
In our view, in the third situation, the GRIP addition for 2006 for ABCco and DEFco would be $504,000 and $0, respectively. Our conclusions are based on the following observations.
The calculation of the GRIP addition for 2006 is more difficult where, during the period 2001 to 2005, two connected corporations paid taxable dividends to each other. That situation creates a problem of circularity in the calculation of the amount referred to in item A of the GRIP addition for 2006 formula, since the calculation of this amount for one corporation depends on the calculation of this amount for the other corporation.
Nevertheless, in a situation such as the third particular situation, as shown in the table below, the amount referred to in paragraph (c) of Element A of the formula for calculating the GRIP addition for 2006 of each of the connected corporations can be determined by successive calculations.
Thus, in the third situation, the amount of $504,000 of the GRIP addition for 2006 for ABCco would ultimately correspond, at the end of the successive calculations, to the excess of the total of the amounts referred to in element A of the formula for calculating the GRIP addition for 2006 for the period 2001 to 2005, being $1,034,000 (that is, the total of the amounts referred to in paragraphs (a) and (b) of the description of A of that formula, i.e., $504,000, and the total of the amounts referred to in paragraph (c) of the description of A of that formula, being $800,000) out of the total of the amounts referred to in the description of B of the formula for calculating the GRIP, being $800,000. Furthermore, in the third situation, the GRIP addition for 2006 for DEFco would be nil at the end of the successive calculations.
The result is the same whether the circular calculations begin with the $800,000 dividend paid by one of the corporations, or the other, as shown in Tables 1 and 2 below.
Table 1
Calculation of the GRIP addition for 2006 in the third particular situation beginning with ABCco
|
Elements |
|||||
|
Sub. 89(7) Corporations |
A a) and b) 63% of FRTI |
A c) Part of dividend from a connected corporation that can reasonably be considered to be attributable to an amount described in paragraphs (a), (b) and (c) of Element A in respect of the paying corporations |
Sub-total |
B Dividends paid |
GRIP addition for 2006 |
|
ABC |
$504 000 |
$0 |
$504 000 |
$0 |
$504 000 |
|
DEF |
$0 |
$0 |
$0 |
$0 |
$0 |
|
ABC |
$504 000 |
$0 |
$504 000 |
<$800 000> |
$0 |
|
DEF |
$0 |
$504 000 |
$504 000 |
<$800 000> |
$0 |
|
ABC |
$504 000 |
$504 000 |
$1 008 000 |
<$800 000> |
$208 000 |
|
DEF |
$0 |
$800 000 |
$800 000 |
<$800 000> |
$0 |
|
ABC |
$504 000 |
$800 000 |
$1 304 000 |
<$800 000> |
$504 000 1 |
|
DEF |
$0 |
$800 000 |
$800 000 |
<$800 000> |
$0 1 |
|
ABC |
$504 000 |
$800 000 |
$1 304 000 |
<$800 000> |
$504 000 |
|
DEF |
$0 |
$800 000 |
$800 000 |
<$800 000> |
$0 |
1: End of circularity.
Table 2
Calculation of the GRIP addition for 2006 in the third particular situation starting with DEFco
|
Elements |
|||||
|
Sub.89(7) Corporations |
A a) and b) 63% of FRTI |
A c) Part of dividend from a connected corporation that can reasonably be considered to be attributable to an amount described in paragraphs (a), (b) and (c) of Element A in respect of the paying corporations |
Sub-total |
B Dividends paid |
GRIP addition for 2006 |
|
DEF |
$0 |
$0 |
$0 |
||
|
ABC |
$504 000 |
$504 000 |
$504 000 |
||
|
DEF |
$0 |
$0 |
<$800 000> |
$0 |
|
|
ABC |
$504 000 |
$0 |
$504 000 |
<$800 000> |
$0 |
|
DEF |
$0 |
$504 000 |
$504 000 |
<$800 000> |
$0 |
|
ABC |
$504 000 |
$504 000 |
$1 008 000 |
<$800 000> |
$208 000 |
|
DEF |
$0 |
$800 000 |
$800 000 |
<$800 000> |
$0 1 |
|
ABC |
$504 000 |
$800 000 |
$1 304 000 |
<$800 000> |
$504 000 1 |
|
DEF |
$0 |
$800 000 |
$800 000 |
<$800 000> |
$0 |
|
ABC |
$504 000 |
$800 000 |
$1 304 000 |
<$800 000> |
$504 000 |
1: End of circularity.
Fourth particular situation
The fourth particular situation is identical to the third particular situation, except that in 2004, ABCco paid a taxable dividend of $100,000 to its parent company.
Your question regarding the fourth situation
You asked us to confirm that, in the fourth particular situation, the amount of the GRIP addition for 2006 for ABCco and DEFco would be $108,000 and $0, respectively.
Our comments on the fourth situation
In our view, in the fourth situation, the GRIP addition for 2006 for ABCco and DEFco would be $404,000 and $0, respectively. For its part, the parent corporation could add $100,000 in computing the amount referred to in paragraph (c) of variable A of the formula for calculating the GRIP addition for 2006, for its 2004 taxation year.
In the fourth particular situation, since DEFco received from ABCco, during the period 2001 to 2005, a portion ($800,000) of the total taxable dividends paid by ABCco ($900,000), the portion of the dividend received by DEFco that can reasonably be considered to be attributable to an amount described in paragraph (a), (b) or (c) of the description of A in respect of ABCco should be prorated based on the taxable dividends received by DEFco out of the total taxable dividends paid by ABCco.
Again, in this particular situation, the circular calculations would give the same result, whether they begin with the dividend paid by one corporation or the other (see Tables 3 and 4 below).
Table 3
Calculation of the GRIP addition for 2006 in the fourth particular situation beginning with ABCco
|
Elements |
|||||
|
S.89(7) Corporations |
A a) and b) 63% of FRTI |
A c) Part of dividend from a connected corporation that can reasonably be considered to be attributable to an amount described in paragraphs (a), (b) and (c) of Element A in respect of the paying corporations |
Sub-total |
B Dividends paid |
GRIP addition for 2006 |
|
ABC |
$504 000 |
$0 |
$504 000 |
$0 |
$504 000 |
|
DEF |
$0 |
$0 |
$0 |
$0 |
$0 |
|
ABC |
$504 000 |
$0 |
$504 000 |
<$900 000> |
$0 |
|
DEF |
$0 |
$448 000 1 |
$448 000 |
<$800 000> |
$0 |
|
ABC |
$504 000 |
$448 000 |
$952 000 |
<$900 000> |
$52 000 |
|
DEF |
$0 |
$800 000 2 |
$800 000 |
<$800 000> |
$0 |
|
ABC |
$504 000 |
$800 000 |
$1 304 000 |
<$900 000> |
$404 000 3 |
|
DEF |
$0 |
$800 000 2 |
$800 000 |
<$800 000> |
$0 3 |
|
ABC |
$504 000 |
$800 000 |
$1 304 000 |
<$900 000> |
$404 000 |
|
DEF |
$0 |
$800 000 2 |
$800 000 |
<$800 000> |
$0 |
1: ($800 000/$900 000) x $504 000 = $448 000
2: ($800 000/$900 000) x $900 000 = $800 000
3: End of circularity.
Table 4
Calculation of the GRIP addition for 2006 in the fourth particular situation starting with DEFco
|
Elements |
|||||
|
S.89(7) Corporations |
A a) and b) 63% of FRTI |
A c) Part of dividend from a connected corporation that can reasonably be considered to be attributable to an amount described in paragraphs (a), (b) and (c) of Element A in respect of the paying corporations |
Sub-total |
B Dividends paid |
GRIP addition for 2006 |
|
DEF |
$0 |
$0 |
$0 |
||
|
ABC |
$504 000 |
$504 000 |
$504 000 |
||
|
DEF |
$0 |
$0 |
<$800 000> |
$0 |
|
|
ABC |
$504 000 |
$504 000 |
<$900 000> |
$0 |
|
|
DEF |
$0 |
$448 000 1 |
$448 000 |
<$800 000> |
$0 |
|
ABC |
$504 000 |
$448 000 |
$952 000 |
<$900 000> |
$52 000 |
|
DEF |
$0 |
$800 000 2 |
$800 000 |
<$800 000> |
$0 3 |
|
ABC |
$504 000 |
$800 000 |
$304 000 |
<$900 000> |
$404 000 3 |
|
DEF |
$0 |
$800 000 2 |
$800 000 |
<$800 000> |
$0 |
|
ABC |
$504 000 |
$800 000 1 |
$304 000 |
<$900 000> |
$404 000 |
1: ($800 000 / $900 000) x $504 000 = $448 000
2: ($800 000/ $900 000) x $900 000 = $800 000
3: End of circularity.
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.