Principal Issues: During a taxation year, a corporation can designate a portion of a dividend it pays to be an eligible dividend under subsection 89(14). Under certain circumstances, at the end of a taxation year, the balance of the GRIP may be less than the total amount of the designations made under subsection 89(14) during the year. In such situation, the corporation will have an excessive eligible dividend designation and will be subject to Part III.1 tax. To avoid such excess, would it be possible for a corporation to make a designation of an eligible dividend under subsection 89(14) that is equal to the lesser of the amount of the dividends paid and the balance of the GRIP at the end of the taxation year?
Position: No.
Reasons: When a corporation has paid taxable dividends during a year, subsection 185.2(1) requires that Schedule T2SCH55 Part III.1, Tax on Excessive Eligible Dividend Designations, be filed. A corporation will generally file Schedule T2SCH53 General Rate Income Pool (GRIP) Calculation to determine the balance of its GRIP at the end of the year. The corporation will have on hand all the information to make the election described in subsection 185.1(2) to avoid an excessive eligible dividend designation and the Part III.1 tax. As indicated on Schedule 55, it is possible for a corporation to make the election before the CRA would assess Part III.1 tax.
FEDERAL TAX ROUNDTABLE OCTOBER 7, 2020
APFF CONFERENCE 2020
11. Eligible dividend designation
In 2017, at the APFF Federal Roundtable, the CRA accepted, in circumstances specific to a wind-up, that the amount of the dividend paid out of the CDA need not be specifically stated in the resolution where the dividend is declared. Depending on the circumstances, it may be difficult to make a reasonable estimate of the expected year-end general rate income pool ("GRIP") at the time a dividend is paid. That is the case, for example, in the event of significant fluctuations in a corporation's results that could cause the year-end GRIP to disappear completely after the dividend is paid due to significant post-dividend losses, as was the case for many corporations as a result of the Covid-19 situation. There are also other circumstances where the eligible dividend designation decision must be made at a specific time, for example, in the context of a sale of a business.
To address these uncertainties in computing the GRIP, it would be possible for the eligible dividend designation, which could be incorporated into the resolution declaring the dividend or be a separate designation, to state that the designation is equal to the lesser of the amount of the dividend and the GRIP at the end of the corporation's taxation year in which the dividend is paid. That would avoid excessive designations where, at the time the dividend is paid, it is difficult to reasonably estimate the year-end GRIP.
Question to the CRA
Would the CRA be prepared to allow an eligible dividend designation to be made without indicating a specific amount, but rather indicating that the amount of the designation is equal to the lesser of the amount of the dividend paid and the GRIP balance at the end of the corporation's taxation year?
CRA Response
Subsection 185.2(1) provides that every corporation resident in Canada that pays a taxable dividend (footnote 1) in a taxation year is required to file with the Minister, in prescribed form (footnote 2), on or before its filing-due date for the year, a return containing an estimate of its tax liability for the year under Part III.1. In addition, where the corporation pays an eligible dividend, it must generally determine its GRIP at the end of its taxation year (footnote 3). Thus, at the end of its taxation year, the corporation has all the information necessary to determine whether it has made an "excessive eligible dividend designation" within the meaning of subsection 89(1) and, as applicable, can make the election under subsection 185.1(2) in order to avoid paying Part III.1 tax.
The CRA does not intend to adopt an administrative position that would allow a corporation to avoid making an excessive eligible dividend designation in a situation similar to the one described in the statement of this question. However, as indicated in the footnote to Schedule 55, the CRA already allows, as an administrative matter, mitigating the effects of an excessive eligible dividend designation by accepting that the election provided for in subsection 185.1(2) can be made by a corporation at the time of filing its income tax return, without having to wait for a notice of assessment of Part III.1 tax to be issued.
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Other than a capital gains dividend as defined in subsection 130.1(4) or subsection 131(1).
2 Namely Schedule 55 - Part III.1 Tax on Excessive Eligible Dividend Designations ("Schedule 55").
3 The corporation's GRIP will be determined in accordance with Schedule 53 - General Rate Income Pool (GRIP) Calculation, which must be filed with the corporation's tax return.