Principal Issues: Whether a corporation that is a beneficiary of an employee trust can deduct an amount pursuant to subsection 112(1) with respect to a dividend received by an employee trust that is paid to the corporation.
Position: No.
Reasons: If the trust is an employee trust, as defined in subsection 248(1), no amount will be added to its income pursuant to subsection 104(13). In the particular circumstances, the amount received by the corporation will not be added to its income pursuant to 104(14) or to section 105. Therefore, subsection 104(19) will not apply and the amount received by the employee trust and paid to the corporation will not be deemed to be a dividend received by the corporation for the purposes of subsection 112(1).
APFF FEDERAL TAX ROUNDTABLE 7 OCTOBER 2013
APFF CONFERENCE 2013
Question 8
Dividend declared to a trust and attributed to the reporting corporation and subsection 112(1)
An employee trust ("Trust") held shares of the capital stock of a taxable Canadian corporation ("the Corporation") that was also a beneficiary of the Trust. At a later date, the Trust decided to terminate the program and the Corporation proceeded to the redemption of the unallocated shares to employees, thereby giving rise to a deemed dividend pursuant to subsection 84(3). This deemed dividend was attributed, by virtue of subsection 104(19), to the Corporation, which was the dividend resulting from the redemption of its own shares.
In Interpretation Bulletin IT-524, the CRA stated in paragraphs 1 and 3 that where a trust receives a taxable dividend on a share of the capital stock of a taxable Canadian corporation and that such trust designates the dividend to a beneficiary under subsection 104(19), the beneficiary, where a corporation, is eligible for the intercorporate dividend deduction under subsection 112(1).
Question to the CRA
Considering paragraphs 1 and 3 of Interpretation Bulletin IT-524, could the Corporation, in the example above, deduct the dividend it received, by virtue of subsection 112(1)?
CRA response
The answer is based on the assumption that the Trust which is the subject of the question is an employee trust, as defined in subsection 248(1).
Where certain conditions are satisfied, subsection 104(19) allows a portion of a taxable dividend received by a trust in a taxation year on a share of the capital stock of a taxable Canadian corporation to be deemed a taxable dividend on the share received by a taxpayer other than a trust for the purposes of, inter alia, section 112. For the purpose of determining whether subsection 104(19) applies, one of the conditions to be satisfied is that the portion of the dividend that the trust receives on a share of the capital stock of a taxable Canadian corporation may reasonably be considered, under the circumstances, including the terms of the trust indenture, as part of the amount that, pursuant to paragraph 104(13)(a), subsection 104(14) or section 105, has been included in computing the taxpayer's income for the taxpayer's taxation year.
An employee trust (as defined in subsection 248(1) of the Act) is a trust referred to in paragraph (a) of the definition "trust" in subsection 108(1). Consequently, such an employee trust is not described in paragraph 104(13)(a) and no amount is to be included in computing a beneficiary's income under that paragraph. Similarly, subsection 104(14) and section 105 do not apply to the situation described.
Consequently, subsection 104(19) does not apply to the situation described. The Corporation would not be deemed, by virtue of subsection 104(19), to have received a dividend from a taxable Canadian corporation for the purposes of section 112.
The amount received by a Corporation in the context of an employee trust created for its employees or that of a person with whom it does not deal at arm's length would be added to the income of the corporation under paragraph 12(1)(n).
Since the amount received by the Corporation would not be added to its income as a taxable dividend under paragraph 12(1)(j) and that the presumption of subsection 104(19) is not applicable, the Corporation would not be entitled to a deduction under subsection 112(1).
On the other hand, if the Trust was no longer an employee trust but rather a trust governed by an employee benefit plan to which the corporation had contributed as an employer, the conclusions would be the same except for the fact that the Corporation would be taxed by virtue of paragraph 12(1)(m) (or paragraph 12(1)(n.1)) rather than 12(1)(n).
Sylvie Labarre
2013-049574