7 January 2008 External T.I. 2007-0225481E5 F - GRIP Addition for 2006

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89(7)

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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 Issues: In a given sitution, where a parent corporation (Parentco) received a taxable dividend of $ 400,000 in 2001 from its wholly-owned subsidiary (Subco) and Subco's variable A of the formula for computing the GRIP Addition for 2006 pursuant to ss 89(7) for 2002 to 2004 was nil and for the years 2001 and 2005 was $125,000 and $ 600,000, respectively, what would be Parentco's and Subco's GRIP Addition for 2006, pursuant to ss 89(7)?

Position: Subco's GRIP Addition for 2006 would be $325,000.

Reasons: Subco's GRIP Addition for 2006 would be $325,000 representing variable A ($ 725,000) minus variable B ($ 400,000) of the formula for computing the GRIP Addition for In our view, Parentco's GRIP Addition for 2006 would be $ 400,000 as it is reasonable to consider, in this situation, that $400,000 of the dividends Parentco received from Subco during the years 2001 to 2005 is attributable to an amount described in variable A of the formula for computing the GRIP Addition for 2006 in respect of Subco, pursuant to ss 89(7).

XXXXXXXXXX 2007-022548
Marc LeBlond
January 7, 2008

Dear Sir,

Subject: Subsection 89(7)

This is in response to your fax of February 22, 2007 in which you requested our comments on the above subject matter regarding the situation described below. We apologize for the delay in responding to your request.

Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").

Particular Situation

Holdco and Opco are "Canadian-controlled private corporations", as defined in subsection 125(7), with a "fiscal period", as defined in subsection 249.1(1), ending on December 31.
Mr. X is the sole shareholder of Holdco, which holds all of the outstanding shares of Opco. Opco is "connected", within the meaning of subsection 186(4), with Holdco.
The amount of Opco's "full rate taxable income" ("FRTI"), as defined in subsection 123.4(1), for each of the years 2001 and 2005 was $198,412 and $952,380, respectively. In 2002, 2003 and 2004, Opco had no FRTI. During 2001, Opco paid a taxable dividend of $400,000 to Holdco. As a result, by virtue of subsection 89(7), for the purpose of calculating the amount of Element A in the formula for computing Opco's general rate income pool addition for 2006 ("GRIP"), $125,000 was added for 2001 and $600,000 for 2005. In addition, the amount of Element B of Opco's GRIP formula was $400,000.
During the years 2001 to 2005, Holdco had no income other than the $400,000 taxable dividend it received from Opco, which was deductible in computing its taxable income pursuant to subsection 112(1).

Your Question

You asked us, in the particular situation, what is the GRIP amount for Holdco and Opco.

Our Comments

In our view, in the situation you have presented to us, the amount of the GRIP for Opco is $325,000, that is, the amount of Element A (i.e., $725,000) minus the amount of Element B (i.e., $400,000) of the formula in subsection 89(7).

Furthermore, in the particular situation, the amount of Holdco's GRIP is $400,000, since it seems reasonable to us to consider, in this situation, that the $400,000 dividend that Holdco received from Opco during 2001 is attributable to an amount described in Element A of the GRIP formula in respect of Opco. Our position appears to be consistent with the purpose and spirit of subsection 89(7).

We hope that our comments are of assistance.

Best regards,

Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.

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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.

Principal Issues: In a given sitution, where a parent corporation (Parentco) received a taxable dividend of $ 400,000 in 2001 from its wholly-owned subsidiary (Subco) and Subco's variable A of the formula for computing the GRIP Addition for 2006 pursuant to ss 89(7) for 2002 to 2004 was nil and for the years 2001 and 2005 was $ 125,000 and $ 600,000, respectively, what would be Parentco's and Subco's GRIP Addition for 2006, pursuant to ss 89(7)?

Position: Subco's GRIP Addition for 2006 would be $ 325,000.

Reasons: Subco's GRIP Addition for 2006 would be $ 325,000 representing variable A ($ 725,000) minus variable B ($ 400,000) of the formula for computing the GRIP Addition for In our view, Parentco's GRIP Addition for 2006 would be $ 400,000 as it is reasonable to consider, in this situation, that $ 400,000 of the dividends Parentco received from Subco during the years 2001 to 2005 is attributable to an amount described in variable A of the formula for computing the GRIP Addition for 2006 in respect of Subco, pursuant to ss 89(7).

XXXXXXXXXX 2007-022548
Marc LeBlond
Le 7 janvier 2008

Monsieur,

Objet: Paragraphe 89(7)

La présente est en réponse à votre fac-similé du 22 février 2007 dans lequel vous nous demandez nos commentaires sur le sujet en rubrique dans la situation décrite ci-après. Nous nous excusons du délai requis pour répondre à votre demande.

À moins d'indication contraire, tous les renvois législatifs dans la présente sont des renvois aux dispositions de la Loi de l'impôt sur le revenu (ci-après la "Loi").

Situation donnée

Holdco et Opco sont des "sociétés privées sous contrôle canadien", au sens prévu au paragraphe 125(7), dont l'"exercice", au sens prévu au paragraphe 249.1(1), se termine le 31 décembre.
M. X est l'unique actionnaire de Holdco qui possède toutes les actions en circulation de Opco. Opco est "rattachée", au sens prévu au paragraphe 186(4), à Holdco.
Le montant du "revenu imposable au taux complet" (ci-après "RITC"), au sens prévu au paragraphe 123.4(1), de Opco pour chacune des années 2001 et 2005 est 198 412 $ et 952 380 $, respectivement. En 2002, 2003 et 2004, Opco n'a eu aucun RITC. Au cours de l'année 2001, Opco a versé un dividende imposable de 400 000 $ à Holdco. Il s'ensuit qu'en vertu du paragraphe 89(7), aux fins du calcul du montant de l'élément A de la formule de calcul de la majoration du compte de revenu à taux général 2006 (ci-après "MCRTG") de Opco, une somme de 125 000 $ est ajoutée pour l'année 2001 et de 600 000 $ pour l'année 2005. Par ailleurs, le montant de l'élément B de la formule de calcul de la MCRTG de Opco est 400 000 $.
Au cours des années 2001 à 2005, Holdco n'a eu aucun autre revenu que le dividende imposable de 400 000 $ qu'elle a reçu de Opco, lequel était déductible dans le calcul de son revenu imposable en vertu du paragraphe 112 (1).

Votre question

Vous nous demandez, dans la situation donnée, quel est le montant de la MCRTG pour Holdco et Opco.

Nos commentaires

À notre avis, dans la situation que vous nous avez soumise, le montant de la MCRTG pour Opco serait de 325 000 $ c'est-à-dire le montant de l'élément A (à savoir 725 000 $) moins le montant de l'élément B (à savoir 400 000 $) de la formule de calcul prévue au paragraphe 89(7).

Par ailleurs, dans la situation donnée, le montant de la MCRTG de Holdco serait de 400 000 $, puisqu'il nous semble raisonnable de considérer, dans cette situation, que le dividende de 400 000 $ que Holdco a reçu de Opco au cours de l'année 2001 est attribuable à une somme visée à l'élément A de la formule de calcul du MCRTG relativement à Opco. Notre position nous apparaît conforme à l'objet et l'esprit du paragraphe 89(7).

Nous espérons que nos commentaires vous seront utiles et nous vous prions d'agréer, Monsieur, l'expression de nos salutations distinguées.

Maurice Bisson, CGA
Gestionnaire
Section des réorganisations des sociétés
et de l'industrie des ressources
Division des réorganisations des sociétés
et de l'industrie des ressources
Direction des décisions en impôt
Direction générale de la politique législative
et des affaires réglementaires

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 89 - Subsection 89(7)

GRIP addition from subsidiary resulting from 2001 and 2005 dividends

A CCPC (Holdco) received (as its only income during the years 2001 to 2005) a taxable dividend of $400,000 in 2001 from its wholly-owned subsidiary (Opco). Opco's "full rate taxable income" ("FRTI") for each of the years 2001 and 2005 was $198,412 and $952,380, respectively; and nil doe 2002, 2003 and 2004. As a result, per s. 89(7), for the purpose of calculating the amount of Element A in the formula for computing Opco's general rate income pool addition for 2006 ("GRIP"), $125,000 was added for 2001 and $600,000 for 2005. In addition, the amount of Element B of Opco's GRIP formula was $400,000.and Subco's Element A of the formula for computing the GRIP Addition for 2006 pursuant to s.89(7) for 2002 to 2004 was nil and for the years 2001 and 2005 was $125,000 and $600,000, respectively. What was Holdco’s and Opco’s GRIP Addition for 2006? CRA responded:

[T]he amount of the GRIP for Opco is $325,000, that is, the amount of Element A (i.e., $725,000) minus the amount of Element B (i.e., $400,000) of the formula in subsection 89(7).

Furthermore … the amount of Holdco's GRIP is $400,000, since it seems reasonable to us to consider, in this situation, that the $400,000 dividend that Holdco received from Opco during 2001 is attributable to an amount described in Element A of the GRIP formula in respect of Opco.

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7 January 2008 External T.I. 2007-0225481E5 F - GRIP Addition for 2006

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