Principal Issues: Whether it would be just and equitable to accept a late eligible dividend designation after March 28, 2012 in the following circumstances:
(1) A corporation paid a capital dividend. After a review by the CRA, the CDA is reduced. Therefore, the capital dividend paid is higher than the CDA and the excess is subject to Part III tax. If the shareholders elect to consider the excess as a taxable dividend, the corporation wishes to make a late eligible dividend designation.
(2) A corporation that claimed the small business deduction is audited by the CRA. The CRA found that the corporation's business is a personal services business. Therefore, the amount of GRIP is increased. The corporation wishes to make a late eligible dividend designation.
Position: A request for a late eligible dividend designation should be addressed to the Tax Services Office or the Taxation Center. The analysis will be done on a case-by-case basis. The responsible person in the TSO or the TC will review all the relevant facts and circumstances with respect to each situation. However, with respect to the two examples described in the question, the CRA has established certain criteria to be met in order for the Minister to exercise her discretionary powers under subsection 89(14.1) (see below).
Reasons: Question of fact.
APFF Roundtable 11 October 2013
APFF Conference 2013
Question 14
Eligible dividend and late designation
At the Canadian Tax Foundation 2012 Prairies Provinces Tax Conference Federal Tax roundtable (question 18), the CRA was queried on the new late designation of a taxable dividend as an eligible dividend under section 89(14.1). Although such late designation is possible with respect to a dividend paid after March 28, 2012, the designation must be made within three years from the day on which the designation was required to be made and it must be the opinion of the Minister that the circumstances are such that it would be “just and equitable” to permit the designation.
With respect to the concept of "just and equitable," the CRA gave examples, at the above Roundtable, of three general situations where a late designation would be acceptable. In addition, the CRA indicated that a late designation would be refused if it was reasonable to conclude that it was requested for retroactive tax planning reasons. Finally, the CRA clarified that the new provision was not intended to permit late designations on a regular or intentional basis.
(a) Can the CRA clarify whether a request for late designation would be considered "just and equitable" in the following circumstances:
(1) A corporation paid a dividend out of its capital dividend account ("CDA") after calculating the CDA balance. However, after the tax authorities audited the CDA balance, it was revised downwards and there was a resulting excess dividend that was subject to Part III tax. To avoid this tax, all the shareholders made an election to treat the excess as a taxable dividend and the corporation filed a request for a late designation so that the taxable dividend would be treated as an eligible dividend.
(2) A corporation was audited for its 2011 and 2012 taxation years. The tax authorities concluded that the corporation carried on a personal services business ("PSB") and that the income earned by the corporation during those two years did not qualify as "income of the corporation for the year from an active business” in Canada under the definition in subsection 125(7). Since the corporation was not entitled to a small business deduction ("SBD") in computing its tax for 2011 and 2012, it "retroactively" accumulated, during these years, an amount in its general rate income pool ("GRIP"). The corporation filed a request for a late designation for taxable dividends that were paid after March 28, 2012.
(b) Can the CRA provide examples of situations that it considers to be a regular or intentional request for late designation?
CRA response to question 14(a)
Subsection 89(14.1) provides that if, in the opinion of the Minister, the circumstances are such that it would be just and equitable to permit a designation under subsection 89(14) to be made before the day that is three years after the day on which the designation was required to be made, the designation is deemed to have been made at the time the designation was required to be made.
A taxpayer must send to the Tax Services Office ("TSO") or the Tax Centre ("TC") serving the taxpayer any request for late designation accompanied by a letter indicating the reasons why the taxpayer believes that it would be just and equitable to allow the late designation. The person responsible at the TSO or TC will analyze all the facts and circumstances surrounding this application for late designation before making a decision, as any CRA decision will be made on a case-by-case basis.
Although each request for late designation will be considered individually by the TSO or TC, those responsible for CRA decision-making will consider the following factors when analyzing a request where the circumstances surrounding the filing for late designation are those described in paragraphs (a)(1) and (2) of the questions.
Situation 14(a)(1)
With respect to a separate deemed dividend paid by virtue of a subsection 184(3) election made because of an excessive capital dividend paid out of the capital dividend account, it would be generally just and equitable to accept a late designation made within the time prescribed in subsection 89(14.1) where the following conditions are satisfied:
- the general rate income pool of the corporation is sufficient so as not to result in an excessive eligible dividend designation;
- the corporation took reasonable steps and the necessary care to comply with the requirements of the capital dividend election under section 83(2) and to correctly calculate the capital dividend account at the time this election was initially made;
- at the time the election was made pursuant to subsection 83(2), the corporation did not have the specific intention to proceed with requesting a late designation under subsection 89(14.1);
- the request for a late designation is not part of a series of requests for late designation made on a regular basis;
- the request for late designation is not made in the context of abusive tax planning;
However, as stated above, the corporation must send, to the TSO or TC that serves it, any requests for late designation accompanied by a letter stating the reasons why the corporation believes it would be just and equitable to allow the late designation. The person responsible at the TSO or TC will analyze all the facts and circumstances surrounding this filing for late designation before making a decision, as any CRA decision will be made on a case-by-case basis.
Situation 14(a)(2)
With respect to a situation where the CRA denies the SBD to a corporation because the CRA considers it have a personal services business, it would generally be just and equitable to accept a late designation within the time provided in subsection 89(14.1) where the following conditions are satisfied:
- the general rate income pool of the corporation is sufficient so as not to result in an excessive eligible dividend designation;
- the request for late designation is not made in the context of abusive tax planning;
- The corporation had reviewed the SBD rules and the personal services business definition with care before completing its returns, and the corporation had substantial ("serieux") arguments for considering that it was entitled to the SBD;
- The corporation or its representatives were not simply reckless ["insouciant"] in applying the provisions of the Act regarding the SBD rules.
However, as stated above, the corporation must send, to the TSO or TC that serves it, any requests for late designation accompanied by a letter stating the reasons why the corporation believes it would be just and equitable to allow the late designation. The person responsible at the TSO or TC will analyze all the facts and circumstances surrounding this filing for late designation before making a decision, as any CRA decision will be made on a case-by-case basis.
CRA response to question 14(b)
The purpose of subsection 89(14.1) is not to allow a late designation when a corporation has deliberately made a request for late designation or has done so on a regular basis. This paragraph covers, among other things, situations where a request for late designation arises out of circumstances beyond the control of a corporation.
The CRA has not developed a list of examples of situations where requests for late designation were made on a regular or deliberate basis.
The following situation is an example that would not be covered by subsection 89(14.1): a corporation which pays annual dividends in cash (or through a reduction in the amount owing to its shareholder) but does not make a designation under subsection 89(14) at the time of payment of the dividend because it is not in a position to determine the amount of the general rate income pool at that time.
Subsection 89(14.1) was not intended to accommodate late designations arising from retroactive planning situations or in the context of abusive tax planning.
Sylvie Labarre
2013-049577