Principal Issues: Where an individual (resident of Canada) is deemed to have received a dividend from a corporation (resident in Canada) after 2005 under paragraph 84.1(1)(b) of the Act, whether such dividend can be designated as an "eligible dividend" pursuant to subsection 89(14) even if the individual does not hold any shares of the capital stock of the corporation.
Position Taken: Yes.
Reasons: Subsection 89(14) and the definition of "eligible dividend" in subsection 89(1) do not refer to dividends paid (or received, as the case may be) "to a shareholder of any class of shares of its capital stock" as provided in subsection 83(2) nor to a dividend paid "on shares of its capital stock" as provided in subsection 129(1). The wording used in the "eligible dividend" provisions is different. Therefore, to be an "eligible dividend" as defined in subsection 89(1) and pursuant to the designation provided for in subsection 89(14), the individual does not have to be a shareholder of any class of shares of the capital stock of the corporation and the deemed dividend paid or received pursuant to paragraph 84.1(1)(b) does not have to be paid by the corporation on shares of its capital stock.
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2012
2012 APFF CONFERENCE
Question 9
Section 84.1 and GRIP
Mr. X is married to Mrs. X. They are both Canadian residents. Mr. X is the sole shareholder of Corporation A and Ms. X is the sole shareholder of Corporation B. Corporation A and Corporation B are private corporations within the meaning of subsection 89(1). The year-end of each of the corporations is July 31st.
On July 31, 2012, Mr. X sold all of the shares of Corporation A to Corporation B for a $50,000 note. The paid-up capital and the adjusted cost base of the shares of Corporation A were nominal. Paragraph 84.1(1)(b) applied to the factual situation and we have assumed that a dividend of $50,000 is deemed to have been paid by Corporation B and received by Mr. X as a result of the disposition of the shares of Corporation A.
Paragraph 84.1(1)(b) states that “for the purposes of this Act, a dividend shall be deemed to be paid to the taxpayer by the purchaser corporation and received by the taxpayer from the purchaser corporation at the time of the disposition in an amount determined by the [following] formula.”
The current wording of paragraph 84.1(1)(b) does not provide that the dividend deemed to be paid by the corporation is deemed to have been paid on a class of its capital stock. Furthermore, section 84.1 does not include a presumption that the recipient of the deemed dividend is deemed to be a shareholder holding shares of the paying corporation. It has already been established that the dividend deemed to be paid under paragraph 84.1(1)(b) is a taxable dividend as defined in subsection 89(1).
On July 31, 2012, Corporation B had a general rate income pool ("GRIP") in the amount of $350,000.
Section 89 provides rules for determining whether a corporation may pay eligible dividends. Under the conditions set out in subsection 89(14), an eligible dividend is a taxable dividend, received by a person resident in Canada, which is paid by a corporation resident in Canada that has designated all (or a portion thereof, as proposed under the 2012 Federal Budget) of that dividend to be an eligible dividend at the time it is paid.
Subsection 89(14) provides that the dividend paid by a corporation is designated as an eligible dividend by notice in writing to each person to whom the corporation pays all or portion of the dividend.
Questions to the CRA
(a) Can the CRA confirm that the deemed dividend of $50,000 resulting from the application of section 84.1 may be designated by Corporation B as an eligible dividend even if the Act does not provide anything respecting the requirement to be a shareholder?
(b) Would your answer to the previous question be different if Mr. X held shares of the capital stock of Corporation B at the time of disposition of his shares of Corporation A?
CRA Response
The definition of "eligible dividend" in subsection 89(1) and subsection 89(14) does not refer to dividends paid (or received, as the case may be) "to shareholders of any class of shares of its capital stock", such as subsection 83(2) nor dividends paid on "shares of its capital stock", as provided in subsection 129(1).
Consequently, according to the wording of subsection 89(14) and of the definition of "eligible dividend" in subsection 89(1), it is not essential that Mr. X hold any shares of any class of the capital stock of Corporation B nor that the dividends be paid on shares of the capital stock of Corporation B for the purpose of the designation under subsection 89(14).
Furthermore, the dividend deemed to have been paid by Corporation B and received by Mr. X pursuant to paragraph 84.1(1)(b) (and for the purposes of the Act) is a dividend received by a person resident in Canada and a dividend paid after 2005 by a corporation resident in Canada. These two conditions are referred to in the definition of "eligible dividend" in subsection 89(1).
In addition, given the amount of the GRIP of Corporation B, a designation of an eligible dividend could be made pursuant to subsection 89(14) in respect of the dividend deemed to have been paid by Corporation B to Mr. X by virtue of paragraph 84.1(1)(b).
Our answer would not be different if Mr. X held shares of the capital stock of Corporation B at the time of the disposition of the shares of the capital stock of Corporation A.
Response prepared by: Sylvie Labarre
(613) 946-5357
2012-045409