Targetco is a CCPC owned by Sellco (also a CCPC) and has a GRIP account of $2.6M. However, the safe income on hand of Sellco in respect of the Targetco shares is only $2M. A dividend received by Sellco in excess of $2M would not augment its own GRIP. Accordingly, it is proposed that:
- Targetco pays a dividend of $2M out of its safe income and also designates it as an eligible dividend under s. 89(14).
- Sellco subscribes for $0.6M of preferred shares of Targetco.
- The paid-up capital of the preferred shares is reduced to a nominal amount without any distribution being made.
- Targetco redeems the preferred shares for $0.6M and designates the $0.6M deemed dividend under s. 89(14). S. 55(2) does not apply as the shares' ACB is $0.6M.
Respecting whether Targetco would be considered to have made an "excessive eligible dividend designation" under (c) of the definition, CRA stated (TaxInterpretations translation):
In the situation described above, Targetco is the only corporation which will pay a dividend and whose GRIP will be reduced. The contemplated transactions will not, by themselves, have the effect of maintaining or increasing the GRIP of Targetco. Consequently, the contemplated transactions, by themselves, would not engage paragraph (c) of the EEDD definition.
However, on a subsequent payment (after the contemplated transactions) of an eligible dividend by Sellco, it would be necessary to examine whether paragraph (c) of the definition of EEDD and subsection 185.1(1) were applicable with respect to Sellco.