Principal Issues: In a given situation where, in a particular taxation year, Bco receives from its wholly-owned subsidiary (Aco) two taxable dividends (the first, an eligible dividend of $3.5 million and a second of $1.5 million), the two taxable dividends are subject to the application of subsection 55(2), and, Bco has designated the first taxable dividend to be two separate taxable dividends of $3 million (the amount of the safe income on hand attributable to the gain on its shares) and another of $500,000, pursuant to paragraph 55(5)(f), whether Bco could include the first taxable dividend in computing its GRIP even though the said taxable dividend is subject to paragraph 55(2)(a)?
Position: No. Bco could include in its GRIP only $3 million.
Reasons: Previous position reiterated.
XXXXXXXXXX 2008-027140 Marc LeBlond December 23, 2008
Dear Madam,
Subject: Computing the general rate income pool
This is in response to your letter of March 7, 2008, in which you asked 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").
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 an analysis of all the facts relating to a particular situation. Accordingly, and given that your letter only summarily describes a given hypothetical situation, the comments we make below may not fully apply in a particular given situation.
The Situation
- Aco and Bco were incorporated under Part 1A of the Québec Companies Act.
- Aco and Bco have the same taxation year-end.
- Aco and Bco are "taxable Canadian corporations", as defined in subsection 89(1), and "Canadian-controlled private corporations", as defined in subsection 125(7).
- Bco has always held 100% of the capital stock of Aco, being all of the common shares thereof.
- At all relevant times, Aco has not had "refundable dividend tax on hand", as defined in subsection 129(3).
- The balance in the "general rate income pool" ("GRIP"), as defined in subsection 89(1), at the end of a particular taxation year of Aco is $3.5 million.
- At the end of that particular taxation year, Aco pays two taxable dividends to Bco: the first for $3.5 million, which Aco designates as an eligible dividend pursuant to subsection 89(14), and the second for $1.5 million. Bco is entitled to a deduction pursuant to subsection 112(1) in respect of these two taxable dividends received from Aco.
- Both dividends received by Bco from Aco are subject to the application of subsection 55(2).
- The safe income on hand attributable to the shares of Aco held by Bco before the "safe income determination time" (as defined in subsection 55(1)) is $3 million. Bco has designated $3 million and $500,000 as separate taxable dividends under paragraph 55(5)(f) in respect of the $3.5 million taxable dividend.
- As a result of the application of subsection 55(2), Bco must report a taxable dividend of $3 million and a capital gain of $2 million on its return of income for the particular taxation year. The $2 million capital gain results from the fact that $500,000 of the first taxable dividend of $3.5 million it received and the taxable dividend of $1.5 million it received are deemed not to be dividends received by Bco, by virtue of paragraph 55(2)(a), and are deemed to be a gain of Bco from the disposition of a capital property for its particular taxation year, by virtue of paragraph 55(2)(c).
2005 Total
Your Question and Comments
You asked, as to the particular situation, whether Bco could include in computing its GRIP, the full amount of the $3.5 million eligible dividend it received from Aco despite a portion of this amount being deemed not to be a taxable dividend through the application of subsection 55(2).
In your view, "The amount received by Bco is clearly a dividend as shown in its financial statements, and it is only through the application of an anti-avoidance tax rule that a portion of this amount is recharacterized in some way as a capital gain."
Our Comments
We are of the view that Bco would not be able to include in computing its GRIP the full amount of the $3.5 million eligible dividend it received from Aco. However, Bco could include $3 million in its GRIP pursuant to paragraph (a) of Element G of the formula for calculating the GRIP. Our conclusions are based on the following observations.
For the purposes hereof, the relevant parts of the GRIP definition read as follows:
general rate income pool at the end of a particular taxation year, of a taxable Canadian corporation that is a Canadian-controlled private corporation or a deposit insurance corporation in the particular taxation year, is the positive or negative amount determined by the formula
A - B
where
A
is the positive or negative amount that would, before taking into consideration the specified future tax consequences for the particular taxation year, be determined by the formula
C + 0.68(D - E - F) + G + H - I
[...]
G is the total of all amounts each of which is
(a) an eligible dividend received by the corporation in the particular taxation year,
[...]
[Emphasis added]
It follows from the above passage in the GRIP definition that a Canadian-controlled private corporation may include in computing its GRIP at the end of a particular taxation year an eligible dividend received by it in the particular year under paragraph (a) of G of the formula for calculating the GRIP.
Subsection 55(2) refers to a corporation that has received a taxable dividend and, if applicable, the amount of such dividend "shall be deemed not to be a dividend received by the corporation" by virtue of paragraph 55(2)(a).
We are of the view that where paragraph 55(2)(a) applies to a taxable dividend received by a corporation, the dividend cannot be included in computing the corporation's GRIP. However, the Canada Revenue Agency (the "CRA") accepts that the portion of the dividend that may be considered safe income on hand attributable to the gain on the shares may be included in the GRIP of the corporation receiving the dividend if the corporation has designated or designates such amount as a separate taxable dividend under paragraph 55(5)(f).
Indeed, the CRA adopted this position in its response to CRA Roundtable Question 13 at the 9th National Conference of the Society of Trust and Estate Practitioners (STEP) Canada on June 8, 2007, as follows:
Question No. 13: Application of 55(2) and GRIP calculation
If applicable, subsection 55(2) of the ITA will deem an otherwise tax-free intercorporate dividend received by a corporation to not be a dividend received by the corporation (see paragraph 55(2)(a)). If the payer corporation had designated the dividend to be an "eligible dividend" pursuant to subsection 89(14), the recipient (assuming the recipient is a Canadian-controlled private corporation) would have included the eligible dividend into its general rate income pool ("GRIP") pursuant to element "G" of the definition of GRIP in subsection 89(1) of the ITA. Given the language in paragraph 55(2)(a), it would appear that the recipient corporation will not have an addition to its GRIP but the payer's GRIP would be depleted (see element "I" of the definition of GRIP in subsection 89(1)). If our understanding is correct, this would appear to be a permanent depletion of GRIP in circumstances where subsection 55(2) of the ITA would apply. Can the CRA confirm our understanding.
CRA Response:
When a Canadian-controlled private corporation ("CCPC") designates a dividend it pays to its shareholders to be an eligible dividend pursuant to subsection 89(14) of the ITA, the GRIP of the payer CCPC would effectively be reduced permanently. This is so because element I of the definition of GRIP in subsection 89(1) of the ITA stipulates that the amount of any eligible dividend paid by a corporation in its preceding taxation year must be deducted in the computation of its GRIP. In fact, the tax treatment of the dividend to the recipient CCPC has no bearing on the computation of the GRIP of the payer CCPC.
As far as the CCPC recipient is concerned, the CRA would generally accept that the recipient CCPC adds to its GRIP the part of the dividend that is covered by safe income (the "safe dividend"), provided that the CCPC recipient made or makes a designation under paragraph 55(5)(f) of the ITA in order that the safe dividend be considered a separate taxable dividend.
In light of the foregoing, in the situation you have submitted to us, we believe that Bco could only include an amount of $3 million in computing its GRIP at the end of the particular taxation year.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industry Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.