11 October 2019 APFF Roundtable Q. 1, 2019-0819401C6 F - Interaction between par. 84.1(1)(b) and 129(1(a)
Principal Issues: Mr. A is married to Mrs. A. Both are resident of Canada. Mr. A is the sole shareholder of Opco1. Mr. A and Mrs. A each own 50% of the shares of the capital stock of Opco 2. Opco 1 and Opco 2 are private corporations pursuant to subsection 89(1). Mr. A disposes of his shares of the capital stock of Opco 1 to Opco 2 in consideration for a note. Paragraph 84.1(1)(b) applies and a dividend is deemed to be paid to Mr. A by Opco 2 and received by Mr. A from Opco 2. Furthermore, paragraph 129(1)(a) states that Opco can obtain a dividend refund in respect of taxable dividends paid on shares of its capital stock in a taxation year and at a time when it was a private corporation. However, in technical interpretation 2002-0128955, the CRA took the position that a corporation is not entitled to a dividend refund under paragraph 129(1)(a) with respect to a dividend it is deemed to have paid under paragraph 84.1(1)(b). Based on such position, Opco 2 could not obtain a dividend refund with respect to the dividend it is deemed to have paid to Mr. A. Whether such position still applies in the scenario described above?
Position: No, technical interpretation 2002-0128955 no longer represents CRA’s position.
Reasons: The granting of a dividend refund to a corporation that is deemed to have paid a dividend under paragraph 84.1(1)(b) in a similar situation achieves an outcome that is more in accordance with the integration principle.
FEDERAL TAX ROUNDTABLE OCTOBER 7, 2019
2019 APFF CONFERENCE
Question 1
Interaction des alinéas 84.1(1)b) L.I.R. et 129(1)a) L.I.R.
Consider the following situation:
- Mr. A is married to Ms. A. They are both Canadian residents.
- Mr. A is the sole shareholder of Opco 1.
- Mr. A and Ms. A each own 50% of the shares of the capital stock of Opco 2.
- Opco 1 and Opco 2 are private corporations as defined in subsection 89(1).
- Mr. A disposes of his shares of the capital stock of Opco 1 to Opco 2 in consideration solely for a note.
Paragraph 84.1(1)(b) applies and, consequently, a dividend is deemed to have been paid by Opco 2 to Mr. A. and received by him at the time of the disposition.
Furthermore, paragraph 129(1)(a) provides that Opco 2 may receive a dividend refund ("DR") in respect of taxable dividends paid by it on shares of its capital stock in a taxation year and at a time when it was a private corporation.
However, in Technical Interpretation 2002-01289552 (the "Interpretation"), the CRA took the position that a deemed dividend paid under paragraph 84.1(1)(b) cannot be considered to be a taxable dividend paid by the corporation on shares of its capital stock for the purposes of paragraph 129(1)(a).
As a result, by virtue of this position, Opco 2 would not be able to receive a DR in respect of the dividend it is deemed to have paid to Mr. A.
Question to the CRA
Does the CRA intend to continue to apply the position taken in the Interpretation with respect to situations similar to that described in this question?
CRA Response
No. We conducted a fresh analysis of this problem and reconsidered our previous positions in that regard. In the light of that analysis, we have come to the conclusion that the position described in the Interpretation no longer represents the position of the CRA. In particular, according a DR to a corporation deemed to have paid a dividend by virtue of paragraph 84.1(1)(b) provides in our view a result that is more compatible with the integration principle enshrined in the Income Tax Act.
Jean Lafrenière
(613) 670-9013
October 11, 2019
2019-081940