Principal Issues: a) Whether the position taken in document No. 2011-0392661E5 is still valid and if so, what would the CRA do in order to avoid audit issues pointed out by certain tax practitioners? b) A portion of a taxable dividend received by a trust in a particular taxation year can be designated under subsection 104(19) at the end of the trust's taxation year. In a particular situation a trust received a taxable dividend and the trust paid the amount of the taxable dividend to its corporate beneficiary. The taxable dividend initially received by the trust was designated by the trust pursuant to subsection 104(19). When will the taxable dividend be considered to have been received by the corporate beneficiary?
Position: a) Yes. General comments provided; b) In the particular situation, June 30, 2014.
Reasons: a) and b) According to the law and previous positions.
APFF - CONFERENCE 2013
Question 9
Dividend paid to a trust and allocation by the trust to a corporate beneficiary: practical problem with Schedule 3
In Interpretation 2011-0392661E5 dated May 2, 2011, the Canada Revenue Agency (the "CRA") indicated how to report, in Schedule 3 of the federal income tax return of a corporation, a dividend paid by a corporation to a trust, where the dividend is designated by the trust to a corporate beneficiary (a corporation connected with the corporation that paid the dividend reported in Schedule 3) in the same taxation year. The CRA's conclusion was very clear and reads as follows:
"The Canada Revenue Agency generally expects a corporation paying a dividend (the "Payer Corporation") to a trust to report the dividend in the total on line 450 of Section 3 of Schedule 3 of its T2 for the taxation year in which the dividend is paid, even if the trust designates such dividend, under subsection 104(19), to one of its recipient corporations to which the Payer Company is connected."
Line 450 in Section 3 of Schedule 3 is the total taxable dividends paid by a corporation in its taxation year to persons other than corporations to which it is connected, in contrast to line 430 which includes dividends paid to corporations to which it is connected.
In practice, however, various accountants have had to justify to CRA auditors the "discrepancies" that existed within a corporate group between dividends received from related corporations (reported in the income tax return of the beneficiary of the corporation) and the dividends paid to related corporations (no dividend, as the dividend is paid to the trust).
In addition, other taxpayers were required to correct the reporting of a dividend paid on Schedule 3 of a paying corporation (originally entered on line 450, but with the CRA requested that it be reported on line 430 of Schedule 3), to avoid, according to the comments made by the CRA officers, the corporation receiving the dividend being assessed Part IV tax of 33 1/3% of the dividend received, as the paying corporation had not paid a dividend to a related company as per Schedule 3.
Questions to the CRA:
a) Can the CRA confirm to us whether its position in Technical Interpretation 2011-0392661E5 dated May 2, 2011 is still valid, and if so, can it tell us if any action will be taken to resolve the issue within the CRA to ensure that cases similar to the situations described above do not happen again in the future?
b) A trust cannot make a designation by virtue of subsection 104(19) until the end of the year (December 31) since it is only then that it can be determined whether it has been resident in Canada throughout the year. In the event that a particular trust (the "Trust") stributes and designates a taxable dividend, that it received on June 30, 2013 from Opco, to its beneficiary, Holdco, whose year-end is June 30. 2013, in which fiscal year, June 30, 2013 or 2014, should the dividend be included in Schedule 3 for Part IV tax purposes, taking into account the dividend refund (“DR”) received by Opco for its completed fiscal year June 30, 2013?
CRA response to Question 9(a)
The position stated in document number 2011-0392661E5 of May 2, 2011 is still valid.
It is only natural that, as part of the execution of audit programs, a CRA representative should contact a taxpayer to verify certain data or to obtain additional information.
On the other hand, it should be expected that any CRA representative will apply all CRA administrative policy with integrity and treat taxpayers fairly.
That being considered, if it turns out that a CRA representative requires a corporation to file Schedule 3 on its T2 income tax return in a way that goes against the position set out in document number 2011-0392661E5 dated May 2, 2011, we invite you to first attempt to resolve the matter with the appropriate CRA representative or his or her supervisor.
If you are not satisfied with the service you received, you can file a toll-free service complaint by faxing 1-866-388-7371 (from Canada or the United States) or 1-819- 536-0701 (from outside Canada and the United States), or by mail to the following address:
CRA Service Complaints
National Intake Centre
PO Box 8000
Shawinigan-Sud (Québec) G9N 0A6
If you are still dissatisfied with the way your complaint has been handled, you can contact the Office of the Taxpayers' Ombudsman to see if your complaint can be dealt with in accordance with its mandate. To learn more about the mandate of the Taxpayers' Ombudsman, you can also visit the website at www.oto-boc.gc.ca or call 1-866-586- 3839.
CRA response to Question 9(b)
Paragraph 104(13)(a) sets out that there will be included in computing the income for a particular taxation year of a beneficiary under a trust (other than a trust referred to in paragraph (a) of the definition trust in subsection 108(1)), such part of the amount that, but for subsections (6) and (12), would be the trust’s income for the trust’s taxation year that ended in the particular year as became payable in the trust’s year to the beneficiary.
However, the amount that, by virtue of paragraph 104(13)(a), is to be added in computing the recipient's income for a particular taxation year may be designated as a taxable dividend by the trust by virtue of subsection 104(19).
In your example, the amount of the taxable dividend received from Opco by the Trust and distributed and designated by it to Holdco would, pursuant to subsection 104(19), be deemed to have been received by Holdco in its taxation year ending on June 30, 2014.
Thus, we are of the view that Holdco should include the amount of the taxable dividend in Schedule 3 on its income tax return for its taxation year ended June 30, 2014 and pay the applicable Part IV tax, where required.
Your last question is a good example of questions from the auditors of the CRA on "gaps" within a corporate group, between deemed dividends received from related companies and dividends paid by a corporation, resulting from presumptions arising from the application of subsection 104(19).
Jean Lafrenière
(613) 941-2956
October 11, 2013
2013-049580