8 October 2010 APFF Roundtable Q. 11, 2010-0373281C6 F - Redemption of shares and eligible dividend

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89(14)

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Principal Questions: Would a designation made under subsection 89(14) of the Act be invalid in a situation where a corporation redeemed the shares of its capital stock, the designation has been made with respect to the deemed dividend arising from the application of subsection 84(3) and where there has been an error in the amount of the paid-up capital resulting in an understatement of the amount of the deemed dividend initially calculated by the parties?

Position: Provided that the GRIP amount is sufficient to cover the correct amount of the deemed dividend and that the designation was made by referring to the number and class of shares being redeemed, the error would not render the designation invalid in such a case. The CRA would not require that a fixed amount be indicated in the designation. Even if there is no reference in the designation to the number and class of shares being redeemed, the designation could be considered valid in cases where it is not possible to consider that the designation could be in respect of another dividend.

Reasons: Where shares are redeemed, the dividend deemed to have been paid is the result of the formula provided for in subsection 84(3). In such a case, the number and class of shares redeemed are the items necessary to identify the dividend for the purposes of subsection 89(14). This position in the context of the application of subsection 84(3) must be distinguished from CRA's position with respect to the designation requirement stated in subsection 89(14) in the context of regular dividends declared by a corporation. In case of regular dividends, CRA's position is that, in order to be valid, an eligible dividend designation must provide the amount of the dividend.

FEDERAL TAX ROUNDTABLE
APFF CONFERENCE 2010

Question 11

Redemption of shares and eligible dividend

A corporation that is a Canadian-controlled private corporation redeemed shares for $100,000. The paid-up capital of the redeemed shares was $1,000 and the redemption resulted in a deemed dividend of $99,000.

The corporation had a general rate income pool (GRIP) balance greater than the deemed dividend. It therefore made the designation under subsection 89(14) to treat the deemed dividend as an eligible dividend.

The following year, it turned out that the calculation of the paid-up capital was erroneous and should have been $100. The deemed dividend was therefore $99,900.

Since the deemed dividend was higher than the designation made under subsection 89(14), the designation became invalid and the entire dividend would be an ordinary dividend even if the corporation has sufficient GRIP to cover the dividend.

a) Does the CRA agree with this interpretation?

b) If so, could the CRA by administrative policy accept the designation made in this type of situation?

CRA Response

The CRA has previously taken the position that it is necessary that the specific amount of a dividend, other than a deemed dividend, be designated by written notice in order for the designation of such a dividend to be valid for the purposes of subsection 89(14). The reason for that position is that the directors will pay, as a dividend, a specific amount that is fixed once paid.

On the other hand, a deemed dividend paid under subsection 84(3) is the result of a calculation specified in that statutory provision. It is that calculation under the Act that determines the amount of the dividend on a particular redemption. It is therefore the details of the redemption that identify the deemed dividend paid on a share redemption because, regardless of the amount indicated by the directors as the deemed dividend paid, the dividend on the redemption will equal the amount calculated by virtue of subsection 84(3), even if the directors indicate an incorrect amount as the deemed dividend that was paid.

Consequently, in the case of a share redemption, it would be sufficient, in order for the designation under subsection 89(14) to be valid, to identify the number and class of shares redeemed and to indicate that the designation is in respect of the dividend deemed to have been paid on that specific share redemption, as calculated under subsection 84(3), as long as the other conditions set out in subsection 89(14) are satisfied. In such a case, the CRA would not require that a fixed amount be indicated in order to designate the dividend as an eligible dividend.

If the designation had been made in that manner, correcting the elements in the calculation of the deemed dividend paid under subsection 84(3) would not result in there being a change in there being a designation. That would not constitute a designation of a partial dividend or a late-filed designation. If the amount of the dividend, as recalculated, did not exceed the GRIP, there would not be an excessive eligible dividend designation. However, in the reverse case, there would be an excessive eligible dividend designation.

If the designation had been made by reference to a precise figure as an eligible dividend without any reference to a redemption of shares or a deemed dividend paid under subsection 84(3), the designation could be considered invalid because it was for a partial dividend. However, if the CRA were to find that the designation could only have been in respect of the deemed dividend paid on that share redemption, the CRA would generally take the position that the designation would be valid in respect of the full amount of the deemed dividend paid.

Sylvie Labarre

(613) 946-5357
October 8, 2010
2010-037328.

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Text of Severed Letter

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principales Questions: Would a designation made under subsection 89(14) of the Act be invalid in a situation where a corporation redeemed the shares of its capital stock, the designation has been made with respect to the deemed dividend arising from the application of subsection 84(3) and where there has been an error in the amount of the paid-up capital resulting in an understatement of the amount of the deemed dividend initially calculated by the parties?

Position Adoptée: Provided that the GRIP amount is sufficient to cover the correct amount of the deemed dividend and that the designation was made by referring to the number and class of shares being redeemed, the error would not render the designation invalid in such a case. The CRA would not require that a fixed amount be indicated in the designation. Even if there is no reference in the designation to the number and class of shares being redeemed, the designation could be considered valid in cases where it is not possible to consider that the designation could be in respect of another dividend.

Raisons: Where shares are redeemed, the dividend deemed to have been paid is the result of the formula provided for in subsection 84(3). In such a case, the number and class of shares redeemed are the items necessary to identify the dividend for the purposes of subsection 89(14). This position in the context of the application of subsection 84(3) must be distinguished from CRA's position with respect to the designation requirement stated in subsection 89(14) in the context of regular dividends declared by a corporation. In case of regular dividends, CRA's position is that, in order to be valid, an eligible dividend designation must provide the amount of the dividend.

TABLE RONDE SUR LA FISCALITÉ FÉDÉRALE
APFF - CONGRÈS 2010

Question 11

Rachat d'actions et dividende déterminé

Une société qui est une société privée sous contrôle canadien a racheté pour 100 000 $ d'actions. Le capital versé des actions rachetées est établi à 1 000 $ et le rachat entraîne un dividende présumé de 99 000 $.

La société a un solde de compte de revenu à taux général (CRTG) supérieur au dividende présumé. Elle fait donc le choix au paragraphe 89(14) L.I.R. de considérer le dividende présumé comme étant un dividende déterminé.

L'année suivante, il s'avère que le calcul du capital versé était erroné et aurait dû être de 100 $. Le dividende présumé est donc de 99 900 $.

Le dividende présumé étant plus élevé que le choix fait en vertu du paragraphe 89(14) L.I.R.; le choix deviendrait invalide et la totalité du dividende serait un dividende ordinaire même si la société a suffisamment de CRTG pour couvrir le dividende.

a) Est-ce que l'ARC est d'accord avec cette interprétation?

b) Si oui, est-ce que l'ARC par politique administrative pourrait accepter la désignation effectuée dans ce type de situation?

Réponse de l'ARC

L'ARC a déjà émis une position selon laquelle il est nécessaire que le montant précis d'un dividende, autre qu'un dividende réputé versé, soit désigné par avis écrit pour que la désignation d'un tel dividende soit valide aux fins du paragraphe 89(14) L.I.R. Cette position s'explique du fait que les administrateurs vont verser, à titre de dividende, un montant précis qui est invariable une fois versé.

Par contre, un dividende réputé versé en vertu du paragraphe 84(3) L.I.R. est le résultat d'un calcul précisé à cette disposition législative. C'est ce calcul prévu par la L.I.R. qui détermine le montant du dividende pour un rachat spécifique. Ce sont donc les détails du rachat qui identifient le dividende réputé versé lors d'un rachat d'actions car, quel que soit le montant indiqué par les administrateurs à titre de dividende réputé versé, le dividende sera égal dès le rachat au montant calculé en vertu du paragraphe 84(3) L.I.R. et ce, même si les administrateurs indiquent un montant erroné au titre de dividende réputé versé.

Par conséquent, dans le cas d'un rachat d'actions, il serait suffisant pour que la désignation prévue au paragraphe 89(14) L.I.R soit valide, d'identifier le nombre et la catégorie d'actions rachetées et d'indiquer que la désignation vise le dividende réputé avoir été versé lors de ce rachat d'actions spécifique, tel que calculé en vertu du paragraphe 84(3) L.I.R et ce, en autant que les autres conditions édictées au paragraphe 89(14) L.I.R. soient satisfaites. Dans un tel cas, l'ARC n'exigerait pas qu'un montant fixe soit indiqué pour désigner le dividende à titre de dividende déterminé.

Si la désignation avait été effectuée de cette manière, le fait de corriger les éléments du calcul du dividende réputé versé en vertu du paragraphe 84(3) L.I.R. n'entraînerait pas un changement au niveau de la désignation. Cela ne constituerait pas une désignation d'un dividende partiel ni une désignation produite en retard. Si le montant du dividende, selon les nouveaux calculs, ne dépassait pas le CRTG, il n'y aurait pas de désignation excessive de dividende déterminé. Cependant, dans le cas contraire, il y aurait désignation excessive de dividende déterminé.

Si la désignation avait été effectuée en mentionnant un chiffre précis à titre de dividende déterminé sans aucune référence à un rachat d'actions ni à un dividende réputé versé en vertu du paragraphe 84(3) L.I.R., la désignation pourrait être considérée comme étant invalide car visant un dividende partiel. Cependant, si l'ARC constatait que la désignation ne pouvait être qu'à l'égard du dividende réputé versé lors de ce rachat d'actions, l'ARC adopterait généralement la position voulant que la désignation soit valide à l'égard du montant total du dividende réputé versé.

Sylvie Labarre
(613) 946-5357
Le 8 octobre 2010
2010-037328

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 89 - Subsection 89(14)

specific dollar amount required for regular dividends, but not for deemed dividend

CRA's position that, in order to be valid, an eligible dividend designation must stipulate the amount of the dividend, only applies to regular dividends, and not to deemed dividends arising under s. 84(3), whose amount is determined under a formula. The designation should refer to the number and class of shares being redeemed. In particular, CRA stated:

[I]n the case of a share redemption, it would be sufficient, in order for the designation under subsection 89(14) to be valid, to identify the number and class of shares redeemed and to indicate that the designation is in respect of the dividend deemed to have been paid on that specific share redemption, as calculated under subsection 84(3), as long as the other conditions set out in subsection 89(14) are satisfied. In such a case, the CRA would not require that a fixed amount be indicated in order to designate the dividend as an eligible dividend.

If the designation had been made in that manner, correcting the elements in the calculation of the deemed dividend paid under subsection 84(3) would not result in there being a change in there being a designation. That would not constitute a designation of a partial dividend or a late-filed designation. If the amount of the dividend, as recalculated, did not exceed the GRIP, there would not be an excessive eligible dividend designation. However, in the reverse case, there would be an excessive eligible dividend designation.

If the designation had been made by reference to a precise figure as an eligible dividend without any reference to a redemption of shares or a deemed dividend paid under subsection 84(3), the designation could be considered invalid because it was for a partial dividend. However, if the CRA were to find that the designation could only have been in respect of the deemed dividend paid on that share redemption, the CRA would generally take the position that the designation would be valid in respect of the full amount of the deemed dividend paid.

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8 October 2010 APFF Roundtable Q. 11, 2010-0373281C6 F - Redemption of shares and eligible dividend

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