CRA does not provide comfort on planning to address GRIP in excess of SIOH

If Sellco’s shares of its CCPC subsidiary, Targetco, have a safe income on hand of $2M but the GRIP of Targetco is $2.6M, the payment of a $2.6M eligible dividend to Sellco (also a CCPC) will only increase its GRIP by $2M, as $0.6M of the eligible dividend would be converted into a capital gain under s. 55(2) (and notwithstanding that Targetco's GRIP in CRA's view will be reduced by $2.6M - see 2010-0385991C6).  To address this, Targetco might pay a cash eligible dividend of $2M, and then Sellco might subscribe $0.6M for preferred shares of Targetco with a nominal PUC – so that the subsequent redemption of those shares could be treated as resulting in a further $0.6M eligible deemed dividend to which s. 55(2) did not apply.

CRA was not especially hostile to this planning.  At the time of any subsequent eligible dividend paid by Sellco, it would be necessary to examine whether the specific anti-avoidance rule, regarding artificial increases in a corporation’s GRIP, applied.

Neal Armstrong.  Summary of 11 October 2013 APFF Round Table, Q. 15, 2013-0495781C6 F under s. 89(1) - "excessive eligible dividend designation."