28 November 1990 Ruling 90M11431 F - Revenue Canada Liaison Committee Meeting on Large Corporations Tax

SUBJECT:  24(1) Revenue Canada Liaison Committee Meeting

We are writing in response to your memorandum of November 16, 1990 regarding the above meeting and, more particularly, with respect to the question tendered by, 24(1) regarding the treatment of dividends payable and receivable and the effects of such amounts in a parent/subsidiary corporate relationship in the calculation of Part I.3 Tax on Large Corporations.

The situation described in the question is one in which a 100% owned subsidiary declares a dividend payable to the parent corporation before the year end and the dividend is not received by the parent until subsequent to that year end. Both the parent and subsidiary have coincidental year-ends. As noted by, 24(1) generally accepted accounting principles require the parent corporation to include the amount of the dividend in income for the year which has the effect of increasing the retained earnings and, consequently, the taxable capital of the parent for the purposes of calculating Part I.3 tax pursuant to paragraph 181.2(3)(a) of the Income Tax Act (the "Act"). Also, paragraph 181.2(3)(e) of the Act specifically includes the declared but unpaid dividend in the calculation of the capital of the subsidiary thereby resulting in the amount of the dividend being included in both the capital of the parent and the subsidiary for purposes of the tax on large corporations. In the opinion of 24(1) this double inclusion results in perverse taxation of an amount of non-existent taxable capital.

We would advise that the aforementioned treatment accorded the unpaid dividend is considered to be correct when calculating the taxable capital of both the parent and subsidiary corporations. We would further advise, however, that, in July 1990, in recognition of this anomalous result, the Department of Finance published a draft amendment to subsection 181.2(4) of the Act concerning the calculation of the investment allowance of a corporation. Specifically, the proposed amendment would add paragraph (f) to subsection 181.2(4) which would operate to include in the investment allowance of a corporation an amount that is "a dividend payable to the corporation". The result of this amendment in the context of the example provided is that the amount of the unpaid dividend will be included in the calculation of the capital of both the parent and subsidiary corporations and will also be included in the calculation of the investment allowance of the parent corporation. Consequently, the amount of the unpaid dividend will effectively be included only once in the calculation of the amount subject to Part I.3 tax when viewed in the context of the corporate group. We would further advise that the proposed amendment would be applicable to taxation years ending after June 1989.

We trust that our comments are of assistance to you.

for DirectorFinancial Industries DivisionRulings Directorate