Principal Issues: In a given situation where, in 2006, Bco's GRIP is $1.3 M and, pursuant to ss 84(3), Bco is deemed to have paid a dividend of approximately $1 M to Cco and Dco (approximately $500,000 each), whether Bco can designate a fraction of the deemed dividend representing Bco's safe income on hand attributable to the purchased shares (approximately $700,000) as an eligible dividend, pursuant to 89(14)?
Position: Yes
Reasons: CRA's policy to allow a dividend to be designated as two separate dividends, applicable only to dividends paid in 2006
XXXXXXXXXX 2007-022753 Marc LeBlond January 21, 2008
Dear Madam,
Subject: General rate income account
This is in response to your letter of March 12, 2007 in which you requested our comments on the above subject regarding the three particular situations 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").
It appears to us that the situations described in your letter and summarized below may be 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 transaction(s), you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments that may be helpful. 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 briefly describes the three hypothetical particular situations, the comments we make below may not be fully applicable in a particular situation.
First 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 the same date. Aco is "connected", as defined in subsection 186(4), to Bco.
- In 2004 and 2005, Aco received a dividend from a corporation ("Cco") that is "connected", within the meaning assigned by subsection 186(4), in the amount of $750,000 that was deductible in computing its taxable income for each of those years pursuant to subsection 112(1). During the years 2001 to 2005, Aco had no income other than the taxable dividends of $1,500,000 received from Cco. During 2005, Aco paid a taxable dividend of $1,500,000 to Bco. As a result, by virtue of subsection 89(7), for the purpose of calculating the amount of A in the formula for computing the 2006 general rate income pool ("GRIP") of Aco, an amount of $750,000 was added for each of 2004 and 2005.
- The taxable dividend of $1,500,000 received by Bco from Aco was deductible in computing its taxable income for 2005 pursuant to subsection 112(1).
Your Question Regarding the First Particular Situation
You asked us to confirm that, in the first particular situation, the amount of the GRIP for Bco is $1,500,000.
Our Comments on the First Particular Situation
In the first situation, provided that it is reasonable to consider that the dividend of $750,000 received by Aco from Cco in each of 2004 and 2005 is attributable to an amount described in element A of the formula for calculating the GRIP in respect of Cco, the amount of Bco's GRIP would be $1,500,000, since it is reasonable to consider, in that situation, that such dividend of $1,500,000 received by Bco from Aco in 2005 is attributable to an amount described in element A of the formula for calculating the GRIP in respect of Cco. This position appears to us to be consistent with the purpose and spirit of subsection 89(7).
Second Particular Situation
The second situation is identical to the first situation, except that Bco received two taxable dividends from Aco. A first dividend of $1,600,000 was received in 2004 and a second of $1,500,000 was received in 2005. Both taxable dividends were deductible in computing Bco’s taxable income for each of those years, pursuant to subsection 112(1).
Your Question Regarding the Second Particular Situation
You asked us to confirm that, in the second particular situation, the amount of the GRIP for Bco is $1,500,000.
Our Comments on the Second Particular Situation
In the second situation, provided that the $750,000 dividend received by Aco from Cco in each of its 2004 and 2005 taxation years can reasonably be considered to be attributable to an amount described in A of the formula for calculating the GRIP in respect of Cco, Bco’s GRIP amount would be $1,500,000, since it is reasonable to consider, in this situation, that $1,500,000 of the dividends that Bco received from Aco during its 2004 and 2005 taxation years would be attributable to an amount described in the description of A of the formula for calculating the GRIP in respect of Aco. This position appears to us to be consistent with the purpose and spirit of subsection 89(7).
Third Particular Situation
- Aco, Bco, Cco and Dco are "taxable Canadian corporations", as defined in subsection 89(1), and "Canadian-controlled private corporations", as defined in subsection 125(7), in their 2006 taxation year ending July 31.
- Each of Cco and Dco holds 30% of the outstanding shares of Bco. The other 40% of the outstanding shares of Bco are held by individuals. Bco is the sole shareholder of Aco. Bco is "connected", within the meaning of subsection 186(4), with Cco and Dco while Aco is "connected" with Bco.
- The balance of Aco's "general rate income pool" ("GRIP"), as defined in subsection 89(1), at the end of its 2006 taxation year was $1,315,352 and the balance of Bco's GRIP at the end of its 2006 taxation year was $1,342,808.
- Bco's GRIP balance at the end of its 2006 taxation year includes $1,315,352 that is an "eligible dividend", as defined in subsection 89(1), received by it from Aco in its 2006 taxation year. In fact, Aco paid to Bco in its 2006 taxation year a taxable dividend of $1,578,037, which it designated as two separate dividends, an "eligible dividend" of $1,315,352 and an ineligible dividend of $262,685.
- At some time in its 2006 taxation year, Bco purchased from Cco and Dco an equal number of shares of their capital stock. Pursuant to paragraph 84(3)(a), Bco was deemed to have paid at that time a dividend on a separate class of shares consisting of the shares so acquired in the amount of $998,908, or $499,454 for each of Cco and Dco. Furthermore, pursuant to paragraph 84(3)(b), each of Cco and Dco was deemed to have received at that time a dividend from Bco of $499,454. The deemed dividend paid by Bco of $998,908 was a "taxable dividend" as defined in subsection 89(1).
- For the purposes of section 55, the portion of "safe income on hand" attributable to the shares of the capital stock of Bco owned by Cco and Dco was $700,854 (i.e. $350,427 for each of Cco and Dco). Cco and Dco elected in respect of the deemed taxable dividend received from Bco of $499,454 pursuant to paragraph 55(5)(f) to designate $350,427 and $149,027 as separate taxable dividends. By virtue of subsection 55(2), the separate taxable dividend of $149,027 was deemed not to be a dividend received by each of Cco and Dco and to be proceeds of disposition of shares of the capital stock of Bco.
Your Questions Regarding the Third Particular Situation
Your first question is whether, in the third particular situation, for purposes of designating a dividend paid as an "eligible dividend" pursuant to subsection 89(14), Bco can designate the deemed taxable dividend paid of $998,908 as two separate dividends, namely, an "eligible dividend" of $700,854 (i.e., an amount of $350,427 for each of Cco and Dco), and an ineligible dividend of $298,054 (i.e., an amount of $149,027 for each of Cco and Dco). If so, you wish to know, for purposes of preparing the "T5 Statement of Investment Income" ("T5") information slip to be prepared by Bco in respect of the deemed dividend paid to each of Cco and Dco of $499,454, whether Bco can report on their T5s as "eligible dividends" an amount of $350,427 and as "dividends other than eligible dividends" an amount of $149,027.
Your second question is whether, in the third particular situation, for purposes of determining element G of the GRIP formula at the end of the 2006 taxation year of each of Cco and Dco, the amount of the "eligible dividend" received by each of them from Bco would be $350,427 or $245,867 (representing $350,427 x $350,427 / $499,454), or some other amount.
Our Comments on the Third Particular Situation
Response to the First Question
In our view, in the third particular situation, Bco could designate $700,854 (i.e., $350,427 for each of Cco and Dco) of the $998,908 dividend amount as an "eligible dividend" pursuant to subsection 89(14). Furthermore, Bco was entitled to include $350,427 as "eligible dividends" and $149,027 as "dividends other than eligible dividends" on the T5 prepared for each of Cco and Dco. Our conclusions are based on the following observations.
The CRA's policy with respect to the designation of a portion of a dividend declared on a particular class of shares as an "eligible dividend" (the "Policy") is described in document E 2006-0217891Z0, as follows:
B. Designation of Portion of Dividend Paid on Class of Shares
All shares of a particular class of shares have the same attributes and therefore, a designation of eligible dividends must include all the shareholders of that class. A designation will not be accepted in respect of the portion of the dividend paid to certain shareholders of a class of shares.
A designation will not be accepted if a corporation designates a fraction of a dividend paid to each shareholder to be an eligible dividend. However, because the legislation is retroactive to dividends paid before the announcement of the new measure, we will allow dividends to be designated as two separate dividends for all dividends paid in 2006. In addition, where a corporation designates two separate dividends, an ineligible dividend and an eligible dividend, these two separate dividends can be paid in one cheque.
[Emphasis added]
In particular, it appears from the Policy that the CRA accepts, on an exceptional basis for 2006, that a corporation may designate as an "eligible dividend" pursuant to subsection 89(14) a fraction of a dividend where the dividend is declared on a class of shares of the capital stock of the corporation and paid to the holders of the shares of that class during 2006.
Thus, in the third particular situation, since by virtue of subsection 84(3) Bco is deemed to have paid a taxable dividend of $998,908 in 2006, it could apply the Exception described in the Policy and designate as an "eligible dividend" by virtue of subsection 89(14) a fraction of the $998,908 dividend, i.e., $700,854 (i.e. an amount of $350,427 for each of Cco and Dco).
Based on the foregoing comments, in the third particular situation you have submitted to us, we are of the view that Bco was entitled to record on the T5 prepared for each of Cco and Dco, in respect of the deemed dividend paid by Bco to each of them, an amount of $350,427 as "eligible dividends" and an amount of $149,027 as "dividends other than eligible dividends.
Response to the Second Question
In our view, in the third particular situation, for the purposes of determining element G of the GRIP formula at the end of the 2006 taxation year of each of Cco and Dco, to the extent that Bco designated as an "eligible dividend" paid an amount of $700,854, the amount of the "eligible dividend" received by each of Cco and Dco would be $350,427.
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.