Principal Issues: In a given situation, where Parentco owns all the shares of Subco, Subco earned $160,000 of full rate taxable income in each of the years 2001 to 2005 and paid to Parentco in each of those years a taxable dividend of $110,000, whether Parentco's and Subco's GRIP Addition, pursuant to subsection 89(7), could be $504 000 and $0, respectively?
Position: Yes.
Reasons: It would be reasonable to consider that $504 000 of the total dividends of $550 000 that Parentco received from Subco during the relevant period was attributable to an amount described in variable A of the formula in respect of Subco's GRIP Addition under subsection 89(7).
XXXXXXXXXX 2008-026469
Marc LeBlond
December 8, 2008
Dear Sir,
Subject: Request for technical interpretation - Subsection 89(7)
This is in response to your e-mail of January 9, 2008 and our telephone conversation (M. LeBlond/XXXXXXXXXX) of November 27, 2008 in which you asked us for our comments on the above subject in relation to the situation described below. We apologize for the delay in responding to your request.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
The situation
- Parentco and Subco were incorporated on January 1, 2000. Since that date, Parentco has held 100% of the shares in the capital stock of Subco.
- At all relevant times, Parentco and Subco were "taxable Canadian corporations" as defined in subsection 89(1) and "Canadian-controlled private corporations" as defined in subsection 125(7).
- During each of the years 2001 to 2005, Subco 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" ("GRIPA2006"), 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 Subco was $504,000.
- In each of the years in the period 2001 to 2005, Subco paid a taxable dividend of $110,000 to Parentco.
- Dividends received by Parentco from Subco were deductible by virtue of subsection 112(1). During the period 2001 to 2005, Parentco received no other income and paid no dividends.
002 2003 2004 2005 Total
Your question and your position in relation to the first particular situation
You are asked us to confirm that, in the particular situation, the amount of the GRIPA2006 for Parentco and Subco would be $504,000 and $0, respectively.
In your view, the amount of the GRIPA2006 for Parentco would be $504,000 because, for purposes of calculating paragraph (c) of variable A of the GRIPA2006 formula, it would be reasonable to consider that $504,000 of the total dividends of $550,000 received by Parentco from Subco during the period 2001 to 2005 would be attributable to an amount described in variable A of the GRIPA2006 formula in respect of Subco.
Our comments on the first situation
It appears to us that the situation described in your letter 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 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 to you. It should be noted that the application of one or more provisions of the Act generally requires the analysis of all the facts relating to a particular situation. Accordingly, and given that your letter only briefly describes a given hypothetical situation, the comments we make below may not apply in full in a given particular situation.
We agree with you that in this situation, Parentco’s GRIPA2006 is $504,000 and Subco's GRIPA2006 is $0.
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.