Principal Issues: (1) Impact of loss carry-back on GRIP computation; (2) Whether a corporation can file amended returns to cancel loss carry-backs and impact on GRIP computation; (3) Whether a corporation that has filed a return under Part III.1 can file a new return under that Part to rectify an understatement made in the initial return.
Position: (1) A loss carry-back will impact the computation of the GRIP of the corporation at the end of the year in respect of which the non-capital loss arises.
Reasons: The law.
XXXXXXXXXX 2021-091900 R. Duong
November 17, 2022
Dear Madam,
Subject: Excessive eligible dividend designation
This letter is in response to your email of November 22, 2021, in which you requested our opinion regarding the application of the rules in the Income Tax Act, R.S.C. 1985, c. 1 (5th Supplement), as amended (the "Act"), to dividends paid by a corporation that it has designated as eligible dividends as defined in subsection 89(1) of the Act.
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
HYPOTHETICAL SITUATION
An operating corporation ("Opco") has been a taxable Canadian corporation (as defined in subsection 89(1)) and a Canadian-controlled private corporation (as defined in subsection 125(7)) since its incorporation. Its taxation year (as defined in subsection 249(1)) is the calendar year.
Opco incurred a non-capital loss, as defined in subsection 111(8) (an "NCL") in each of its 2019 and 2020 taxation years (the "2019 Loss Year" and the "2020 Loss Year," respectively).
Opco carried back the NCL incurred in 2019 for application against its taxable income for the 2016 and 2017 taxation years, and the NCL incurred in 2020 to the 2017 and 2018 taxation years ("2016 Application Year", "2017 Application Year" and "2018 Application Year," respectively). As a result of the NCL carrybacks, Opco's taxable income for each of the 2016, 2017 and 2018 Application Years was reduced to nil. In the 2020 Loss Year, Opco paid two taxable dividends of $200 each to its corporate shareholder. Those amounts were reported on the tax return filed by Opco for that year. Opco also made the designation under subsection 89(14) in respect of each of the two dividends to be eligible dividends.
Opco made an excessive eligible dividend designation (as defined in subsection 89(1)) in respect of each of the two eligible dividends paid in the 2000 Loss Year.
Opco filed a Part III.1 return for the 2020 Loss Year on the prescribed form (footnote 1). However, only one taxable dividend of $200 was reported on Schedule 55 filed by Opco, due to a good faith error by the tax preparer (who took into account only one of the two taxable dividends of $200).
YOUR QUESTIONS
1) At the end of which years do the 2019 and 2020 NCL carrybacks to the 2016, 2017 and 2018 Application Years reduce Opco's general rate income pool ("GRIP"), as defined in subsection 89(1)?
2) Could Opco apply to have the NCL carrybacks reversed so as to restore taxable income for the 2016 to 2018 years and thereby increase its GRIP back to a level allowing eligible dividends to be paid without being subject to Part III.1 tax?
3) Could Opco file an amended Schedule 55 to redetermine the amount of Part III.1 tax in respect of the excessive eligible dividend designation and make the election under subsection 185.1(2)?
OUR COMMENTS
This technical interpretation provides general comments on provisions of the Act and other related legislation, where applicable. It is not intended to confirm the tax treatment of any particular situation involving a particular taxpayer, but rather to assist you in determining the tax treatment. Our Directorate will only confirm the tax treatment of a particular taxpayer's transactions in the context of a request for an advance income tax ruling as described in Information Circular 70-6R12, Advance Income Tax Rulings and Technical Interpretations.
First Question
Opco's GRIP at the end of a particular taxation year is the positive or negative sum obtained by the formula A - B.
The sum for item A at the end of an Opco taxation year is the positive or negative sum obtained by the formula C + D + E + F - G before taking into account the future tax consequences determined for the particular year.
B is the product obtained by multiplying Opco's general rate factor for the year by the difference between (i) the total of its taxable income at the full rate for the three preceding taxation years calculated before taking into account the specified future tax consequences for those years - which consequences arise in respect of the particular year, and (ii) the total of that taxable income with the inclusion of those consequences. The term "specified future tax consequence" is defined in subsection 248(1). Under paragraph (a) of the definition, a specified future tax consequence for a taxation year includes the consequence of the deduction or exclusion of an amount referred to in paragraph 161(7)(a). More specifically, subparagraph 161(7)(a)(iv) refers to any amount deducted under section 111 in respect of a loss for a subsequent taxation year. Thus, a corporation's GRIP at the end of a taxation year in which it has a loss - which is carried back - will be reduced at the end of that year by virtue of Element B.
Consequently, we are of the view that the amount of the NCL for Opco's 2019 Loss Year that was applied against its taxable income for each of the 2016 and 2017 Application Years would reduce its GRIP at the end of the 2019 Loss Year. Similarly, the amount of Opco's NCL in its 2020 Loss Year that was applied against its taxable income for each of the 2017 and 2018 Application Years would reduce its GRIP at the end of the 2020 Loss Year.
Second Question
Whether Opco can obtain an amendment of the original carrybacks in the hypothetical situation depends on the exercise of the Minister's discretion in accordance with the criteria in subparagraph 152(4)(b)(i) and paragraph 152(6)(c).
Subparagraph 152(6)(c) provides that, where a taxpayer has filed for a particular taxation year the return of income required by section 150 and an amount is subsequently claimed by the taxpayer or on the taxpayer’s behalf for the year as a deduction under section 111 in respect of a loss for a subsequent taxation year, by filing with the Minister, on or before the day on or before which the taxpayer is, or would be if a tax under this Part were payable by the taxpayer for that subsequent taxation year, required by section 150 to file a return of income for that subsequent taxation year, a prescribed form amending the return, the Minister shall reassess the taxpayer’s tax for any relevant taxation year.
Subparagraph 152(4)(b)(i) provides that the Minister may make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year.
Such an assessment may be made after the end of the normal reassessment period applicable to the taxpayer for the year only if the assessment is made before the day that is three years after the end of the normal reassessment period for the taxpayer in respect of the year and is required to be made under subsection 152(6) or 152(6.1), or would be so required if the taxpayer had claimed an amount by filing the prescribed form referred to in that subsection on or before the day referred to in that subsection, and to the extent that the assessment can reasonably be considered to relate to one of those subsections pursuant to paragraph 152(4.01)(b)(i).
To the extent that Opco initially carried back its NCL incurred in its 2019 Loss Year for application against its taxable income for the 2016 and 2017 Application Years - having met the criteria in paragraph 152(6)(c) - and the Minister would have reassessed Opco's tax for each of its Application Years, the Minister could reduce the amount of the initial NCL carrybacks during the reassessment period of each Application Year if Opco so requested. In this regard, under the terms of subparagraphs 152(4)(b)(i) and 152(4.01)(b)(i), the Minister has the discretion to accept or reject such a request. For example, the Minister could agree to reduce the amount of those initial carrybacks to the extent that an error was made in good faith, but could refuse to do so in a situation amounting to retroactive tax planning. Since the initial request for a NCL carryback was linked to the filing of Opco's 2019 Loss Year tax return, the request to reduce the carryback amounts would have to meet both the conditions in subsections 152(3.1) and 152(4) in respect of the 2019 Loss Year and those in subparagraphs 152(4)(b)(i) and 152(4.01)(b)(i) in respect of the 2016 and 2017 Application Years for the Minister to consider it.
The reduction in the NCL amounts carried back to the 2016 and 2017 Application Years would then be up to the amount set out in the reassessment that was made pursuant to subparagraph 152(4)(b)(i) for each of those years. The amount determined for element B in Opco's GRIP calculation at the end of its 2019 Loss Year would then be adjusted to take into account the amount reassessed for the 2016 and 2017 Application Years.
The same reasoning would apply in respect of a request to reduce the amount of the initial carryback from the 2020 Loss Year to the 2017 and 2018 Application Years in a situation involving a bona fide error and not amounting to retroactive tax planning. The amount for element B in the GRIP calculation at the end of the 2020 Loss Year would be adjusted to take into account the amount reassessed for each of the years.
Third Question
Under subsections 152(3) and 185.2(2), an inaccurate or incomplete assessment would not affect Opco's liability for Part III.1 tax for the 2020 Loss Year. Opco would therefore be responsible for filing an amended Schedule 55 to report that the actual amount of taxable dividends paid in the 2020 Loss Year was $400 rather than $200, correcting the amount of the excessive eligible dividend designation for that year, if any - regardless of whether the original carrybacks of its NCLs were reversed - and paying the resulting Part III.1 tax, subject to the subsection 185.1(2) election.
If Opco were to request an adjustment to its Part III.1 tax payable as a result of an adjustment to its NCL carrybacks under Question 2, then Opco would be required to file, in addition to Schedule 55, an amended Schedule 53 to reflect the corresponding adjustment to its GRIP. A Part III.1 reassessment for the 2020 Loss Year could be made during the period provided for in subparagraph 152(4)(b)(i) and in accordance with subparagraph 152(4.01)(b)(i) since the reassessment could be considered to be required to be made pursuant to subsection 152(6).
In the absence of a request for an adjustment to NCL carrybacks, we are of the view that the Minister could reassess under Part III.1 during the normal reassessment period under subsection 152(3.1) applicable to the 2020 Loss Year, provided that the amended Schedule 55 is filed in a timely manner.
Opco could make the election under subsection 185.1(2) to the extent that the Minister reassesses the Part III.1 tax and any interest and penalties payable for the 2020 Loss Year. Opco would be able to file this election on or before the 90th day after the day on which the notice of reassessment (which is an assessment within the meaning of subsection 248(1)) is sent and in the manner applicable pursuant to subsection 185.1(2). Based on the administrative practice set out in Schedule 55, we accept that this election should be made prior to the sending of the notice of reassessment of the Part III.1 tax to be assessed under amended Schedule 55. In addition, this election should meet the criteria of subsection 185.1(3).
Best regards
Jean Lafrenière LL. B., LL. M. Fisc.
For the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Schedule 55 "Part III.1 Tax on Excessive Eligible Dividend Designations" ("Schedule 55").