28 June 2001 External T.I. 2001-0085255 - MICs - Deemed Dividends

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Can a stock dividend be a "taxable dividend" for the purposes of subsection 130.1(1) and hence, be deducted in computing a MIC's income? If a MIC increases its paid-up capital resulting in a deemed dividend under subsection 84(1), is the deemed dividend a dividend for the purposes of subsection 130.1(1) and deductible in computing the MIC's income?

Position: Yes to both questions.

Reasons: A stock dividend is a taxable dividend for the purposes of subsection 130.1(1) where it satisfies the definition "taxable dividend" in subsection 89(1) of the Act. MICs are subject to subsection 84(1). Therefore, a dividend deemed to be paid under that subsection is a dividend for the purposes of subsection 130.1(1) and deductible if the provisions of subsection 130.1(1) are otherwise satisfied.

XXXXXXXXXX 						2001-008525

June 28, 2001

Dear XXXXXXXXXX:

Re: Request for Technical Interpretation
Mortgage Investment Corporations (MICs)

This is in reply to your letter of May 22, 2001 requesting our comments on two questions respecting "mortgage investment corporations"(MICs) as defined in subsection 130.1(6) of the Income Tax Act ("Act"). Both questions are based on a hypothetical MIC that has income in a fiscal year, prior to any dividends being paid, of $50,000. The MIC has one issued and outstanding share class, being "Class A" voting and participating shares. No dividends are paid in the fiscal year. A taxable dividend (other than a capital gains dividend) in the amount of $50,000 is paid within 90 days after the end of the MIC's fiscal year.

Your first question is whether the taxable dividend could be paid in the form of a stock dividend for the purposes of paragraph 130.1(1)(a) of the Act where the "amount" of the stock dividend, as defined in subsection 248(1) of the Act, is the amount by which the paid-up capital of the MIC paying the dividend is increased by the payment of the stock dividend. Your second question is whether the taxable dividend for the purposes of paragraph 130.1(1)(a) could be a deemed dividend under subsection 84(1) of the Act resulting from an increase in the MIC's paid-up capital.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments, with all statutory references being references to the Act.

To qualify as a MIC, a corporation must meet the requirements of subsection 130.1(6) throughout the taxation year. Whether a corporation has met the requirements of subsection 130.1(6) throughout a taxation year is a question of fact that can only be determined after a thorough examination of all the relevant facts.

Subparagraph 130.1(1)(a)(i) allows a MIC a deduction for a taxable dividend, other than a capital gains dividend, and subsection 130.1(2) deems the dividend to have been received as interest by the shareholder, provided the dividend is paid during the taxation year or within 90 days after the taxation year end. A "dividend" is defined in subsection 248(1) to include a stock dividend. A "taxable dividend" is defined in subsections 248(1) and 89(1) to include all dividends other than a dividend for which the corporation paying the dividend has elected under subsection 83(1) (as it read prior to 1979) or subsection 83(2), and a dividend paid to shareholders of a prescribed class of tax-deferred preferred shares within the meaning of subsection 83(1). Therefore the payment of a stock dividend would constitute payment for the purposes of subparagraph 130.1(1)(a)(i) and subsection 130.1(2) where the stock dividend is a taxable dividend as defined in subsection 89(1). Pursuant to paragraph (c) of the definition of "amount" in subsection 248(1) the amount of such dividend would be equal to the amount of the increase in the paid-up capital of the corporation as a consequence of the dividend.

Moreover, as MICs are subject to subsection 84(1), an increase in the paid-up capital of the MIC that satisfies the provisions of that subsection would result in the MIC being deemed to have paid a dividend for the purposes of subparagraph 130.1(1)(a)(i) and subsection 130.1(2). The dividend would be deductible in computing the MIC's income pursuant to paragraph 130.1(1)(a) where the provisions of that paragraph are otherwise satisfied.

While the foregoing comments are not binding the on the Canada Customs and Revenue Agency, we trust that they assist.

F. Lee Workman
Manager
Financial Institutions
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate