15 January 2007 External T.I. 2006-0207651E5 - New Dividend Reporting Rules - CCPC 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.

Principal Issues: How a dividend paid by a CCPC during 2006 is to be reported by a shareholder.

Position: Depends upon its characterization as an eligible dividend or other taxable dividend from a taxable Canadian corporation.

Reasons: The Act.

2006-020765
XXXXXXXXXX James Atkinson CGA
(519) 457-4832
January 15, 2007

Dear Madam/Sir:

Re: New Dividend Reporting Rules - CCPC Dividends

This is in response to your letter of August 22, 2006 inquiring about the tax treatment of dividends received from a Canadian-controlled private corporation (CCPC), that have been paid in 2006.

Our Comments:

The Department of Finance released draft legislation in June of 2006, designed to implement a new system for the taxation of "eligible dividends" paid after 2005 by corporations resident in Canada to individual shareholders resident in Canada. The proposed legislation (Bill C-28) received third reading in the House of Commons on December 11, 2006. The new system of dividend taxation builds upon, but does not replace, the existing gross-up and dividend tax credit provisions.

The tax treatment afforded a shareholder in respect of a dividend received in 2006 is dependent upon its characterization as either an:

? eligible dividend, which is a defined term in the proposed legislation, or,

? other taxable dividend from a taxable Canadian corporation.

An "eligible dividend" received by an individual taxpayer will benefit from a 45% gross-up and a federal tax credit equal to 11/18 of the gross-up. Other taxable dividends from taxable Canadian corporations remain subject to a 25% gross-up and a federal tax credit equal to 2/3 of the gross-up. A dividend is an "eligible dividend" if the dividend-paying corporation has given the dividend recipient written notice to that effect. On December 20, 2006, the Canada Revenue Agency (CRA) issued a News Release titled "Designation of Eligible Dividends". As indicated in the News Release, acceptable methods of written notification to a shareholder that a dividend paid in 2006 is an eligible dividend will include a note on the T3 or T5 slip issued, posting a notice on the corporation's website, and in corporate records or shareholder publications.

For 2007 and subsequent taxation years, the notification requirements must be met each time a dividend is paid by a CCPC. Examples of notification by a CCPC could include identifying eligible dividends through letters to shareholders and dividend cheque stubs, or where all shareholders are Directors of a corporation, a notation in the Minutes. The News Release can be accessed on the internet at http://www.cra-arc.gc.ca.

There may be a limited capacity to pay eligible dividends, depending upon the type of corporation making the payment. We offer the following general comments on a corporation's capacity to pay eligible dividends.

If a corporation is a CCPC or a deposit insurance corporation (DIC), it can pay eligible dividends only to the extent of its "general rate income pool" (GRIP) - a balance generally reflecting taxable income that has not benefited from the small business deduction or any of certain other special tax rates. A corporation that is not a CCPC or DIC can pay eligible dividends in any amount, unless it has a "low rate income pool" (LRIP). The LRIP is generally made up of taxable income that benefited from the small business deduction. A given corporation will have at most one GRIP or one LRIP at any time, and that one pool is relevant to the dividends it pays on all classes of its shares. This means that, subject to any constraints in the existing law and the need to avoid artificial manipulations of the pools, a corporation may choose which of its shareholders will receive eligible or other dividends.

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch