Principal Issues: In a given sitution, where a parent corporation (Parentco) received a taxable dividend of $ 400,000 in 2001 from its wholly-owned subsidiary (Subco) and Subco's variable A of the formula for computing the GRIP Addition for 2006 pursuant to ss 89(7) for 2002 to 2004 was nil and for the years 2001 and 2005 was $125,000 and $ 600,000, respectively, what would be Parentco's and Subco's GRIP Addition for 2006, pursuant to ss 89(7)?
Position: Subco's GRIP Addition for 2006 would be $325,000.
Reasons: Subco's GRIP Addition for 2006 would be $325,000 representing variable A ($ 725,000) minus variable B ($ 400,000) of the formula for computing the GRIP Addition for In our view, Parentco's GRIP Addition for 2006 would be $ 400,000 as it is reasonable to consider, in this situation, that $400,000 of the dividends Parentco received from Subco during the years 2001 to 2005 is attributable to an amount described in variable A of the formula for computing the GRIP Addition for 2006 in respect of Subco, pursuant to ss 89(7).
XXXXXXXXXX 2007-022548
Marc LeBlond
January 7, 2008
Dear Sir,
Subject: Subsection 89(7)
This is in response to your fax of February 22, 2007 in which you requested our comments on the above subject matter regarding the situation described below. We apologize for the delay in responding to your request.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Particular Situation
- Holdco and Opco are "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.
- Mr. X is the sole shareholder of Holdco, which holds all of the outstanding shares of Opco. Opco is "connected", within the meaning of subsection 186(4), with Holdco.
- The amount of Opco's "full rate taxable income" ("FRTI"), as defined in subsection 123.4(1), for each of the years 2001 and 2005 was $198,412 and $952,380, respectively. In 2002, 2003 and 2004, Opco had no FRTI. During 2001, Opco paid a taxable dividend of $400,000 to Holdco. As a result, by virtue of subsection 89(7), for the purpose of calculating the amount of Element A in the formula for computing Opco's general rate income pool addition for 2006 ("GRIP"), $125,000 was added for 2001 and $600,000 for 2005. In addition, the amount of Element B of Opco's GRIP formula was $400,000.
- During the years 2001 to 2005, Holdco had no income other than the $400,000 taxable dividend it received from Opco, which was deductible in computing its taxable income pursuant to subsection 112(1).
Your Question
You asked us, in the particular situation, what is the GRIP amount for Holdco and Opco.
Our Comments
In our view, in the situation you have presented to us, the amount of the GRIP for Opco is $325,000, that is, the amount of Element A (i.e., $725,000) minus the amount of Element B (i.e., $400,000) of the formula in subsection 89(7).
Furthermore, in the particular situation, the amount of Holdco's GRIP is $400,000, since it seems reasonable to us to consider, in this situation, that the $400,000 dividend that Holdco received from Opco during 2001 is attributable to an amount described in Element A of the GRIP formula in respect of Opco. Our position appears to be consistent with the purpose and spirit of subsection 89(7).
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.