Principal Issues: In a given situation, where a parent corporation (Parentco) received taxable dividends of $1.2 M in 2003 and $300,000 in 2005 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 2001 to 2003 was nil and for the years 2004 and 2005 was $400 000, whether the $300,000 taxable dividend received from Subco in 2005 increases Parentco's GRIP Addition for 2006 pursuant to ss 89(7)?
Position: Parentco's GRIP Addition for 2006 would be $400,000.
Reasons: In our view, it is reasonable to consider in this situation that the amount of $400,000 of the taxable dividends Parentco received from Subco during the years 2003 and 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 2007-022707
Marc LeBlond
January 7, 2008
Dear Sir,
Subject: Subsection 89(7)
This is in response to your letter of March 6, 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
- Aco and Bco 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.
- Aco holds all of the outstanding shares of Bco. Bco is "connected", as defined in subsection 186(4), to Aco.
- Aco carries on a "specified investment business", as defined in subsection 125(7), while Bco has "income of the corporation … from an active business " in Canada, as defined in subsection 125(7).
- In 2001, 2002 and 2003, Bco had no "full rate taxable income" ("FRTI") as defined in subsection 123.4(1). The total amount of Bco's FRTI for 2004 and 2005 was $634,920. In each of 2003 and 2005, Bco paid a taxable dividend of $1,200,000 and $300,000, respectively, to Aco. As a result, pursuant to subsection 89(7), the amount of Element A in the 2006 general rate income pool addition for 2006 ("GRIP") for Bco for the years 2001 to 2003 was nil and the amount of Element A in the GRIP Addition for the years 2004 and 2005 was $400,000. On the other hand, the amount of Element B in the GRIP Addition for Bco for the years 2001 to 2005 was $1,500,000.
- During the years 2001 to 2005, Aco had no income other than the taxable dividends of $1,200,000 and $300,000 it received from Bco, which were deductible in computing its taxable income for those years pursuant to subsection 112(1).
Your Question
You asked us, regarding the particular situation, whether the $300,000 taxable dividend received by Aco in 2005 increased its GRIP addition pursuant to subsection 89(7).
Our Comments
In our view, in the situation you have presented to us, the amount of Aco's GRIP Addition would be $400,000 since it seems reasonable to us to consider, in this situation, that $400,000 of the dividends Aco received from Bco in its 2003 and 2005 taxation years would be attributable to an amount described in Element A of the GRIP Addition in respect of Bco. We believe that our position is 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.