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: Where, pursuant to 184(3), the excess portion of a capital dividend is deemed to be a separate taxable dividend that was payable at the time the original dividend was payable, can the separate taxable dividend be designated to be an eligible dividend pursuant to 89(14)?
Reasons: The designation would necessarily be made after the time required by 89(14) and there is no provision for this designation to be late-filed.
January 29, 2008
Doug Schober HEADQUARTERS
Business Returns and Payments Income Tax Rulings
Processing Directorate Directorate
T2 Special Processing and Records Marc L. Edelson, LL.B.
9755 King George Hwy (613) 957-2123
Surrey BC V3T 5E1
Subsections 89(14) and 184(3)
This is in reply to correspondence received from you on July 6, 2007. In this letter, unless otherwise stated all statutory references are to the Income Tax Act (Canada) (herein, the "Act") and references to the "CRA" are to the Canada Revenue Agency.
We have been asked to consider whether, in the situation outlined below, a designation can be made by a corporate taxpayer for a dividend that it paid to be an eligible dividend.
Your inquiry relates to the situation where a corporation has, in the prescribed manner, declared a dividend paid by it to be a capital dividend for the purposes of subsection 83(2). Some months after the payment of the dividend the CRA determines that the amount declared by the corporation to be a capital dividend was in excess of the corporation's capital dividend account balance immediately before the payment of the dividend. As a consequence, and to avoid the tax otherwise imposed under Part III (subsection 184(2)), the corporation makes the election provided in subsection 184(3) to treat the portion of the dividend in excess of the corporation's capital dividend account balance as a separate taxable dividend that was payable at the time the original dividend was payable.
Your inquiry asks that we consider whether, at the time the election is made for the purposes of subsection 184(3), the designation referred to in subsection 89(14) may also be made so that the separate taxable dividend is treated as an eligible dividend.
For the purposes of this inquiry, we have assumed that the corporation's general rate income pool ("GRIP") was, at all relevant times, in excess of the separate taxable dividend amount so that no part of any designated amount will be treated as an "excessive eligible dividend designation" within the meaning of that term in subsection 89(1).
In your inquiry you have asked that we consider the influence, if any, of the decision of the Federal Court of Appeal in The Queen v. Nassau Walnut Investments Inc., 97 DTC 5051.
In general terms, subsection 89(1) defines an "eligible dividend" as a taxable dividend that is paid by a corporation resident in Canada to a person resident in Canada and that is designated to be an eligible dividend in the manner provided in subsection 89(14).
Subsection 89(14) requires that, at the time it pays the dividend that is designated to be an eligible dividend, the corporation give each person or partnership who receives any part of the dividend a written notification that the dividend is an eligible dividend.
In explanatory notes prepared by the Department of Finance with respect to subsection 89(14) (EN February 2007 [S.C. 2007, c. 2 (Bill C-28)]), it indicated that it was not prepared to recognize designations filed on or after the time referred to in subsection 89(14). In the explanatory note it stated:
Note that the designation set out under subsection 89(14) will not be prescribed for the purposes of section 600 of the Income Tax Regulations.
On July 10, 2007, the CRA issued a news release entitled "Update on Eligible Dividends". We stated:
For 2007 and subsequent taxation years, for public corporations, we will accept that notification has been made if, before or at the time the dividends are paid, a designation is made stating that all dividends are eligible dividends unless indicated otherwise. Acceptable methods of making a designation are posting a notice on the corporation's website, and in corporate quarterly or annual reports or shareholder publications. We will consider that a notice posted on a corporate website is notification that an eligible dividend is paid to shareholders until the notice is removed. Similarly, a notice in an annual or quarterly report that an eligible dividend has been paid is considered valid for that year or quarter, respectively. Alternatively, if a public corporation issues a press release announcing the declaration of a dividend, a statement in the press release indicating that the dividend is an eligible dividend will be sufficient proof that notification was given to each shareholder.
For 2007 and subsequent taxation years, for all corporations other than public corporations, the notification requirements of proposed subsection 89(14) must be met each time a dividend is paid. Examples of notification 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 reference in the first paragraph to notifications being made "before or at the time the dividends are paid" is the same time period referred to in respect of non-public corporations described in the second paragraph.
Some jurisprudence has held that certain designations may be late-filed, even though there is no specific statutory provision that permits it. In The Queen v Nassau Walnut Investments Inc, 97 DTC 5051 (FCA), the Court considered a designation provided in paragraph 55(5)(f) that was to be made in the taxpayer's return of income for the taxation year in which the relevant dividend was received. The Court held that, in the case before it, the absence of a specific right to late-file a designation merely raised a rebuttable presumption that such a right did not exist. The Court concluded that the taxpayer was entitled to make the late designation by objecting to a reassessment that concerned an issue to which the designation was related, being the amount of safe income attributable to a dividend paid by the taxpayer. Also see Administration Gilles Leclair Inc. v. The Queen, 97 DTC 880 (TCC) and Jeanette Lussier v. The Queen, 2000 DTC 1677 (TCC), where the courts reached similar conclusions.
The CRA made a decision not to appeal the Nassau Walnut decision (or the other decisions referred to) and, instead, to accept late-filed designations, giving due consideration to the application of certain penalty provisions.
We consider that the designation required by subsection 89(14) is significantly different from the type of designations considered in the Nassau Walnut line of cases. This is not a designation that is made in a tax return or, as in the Nassau Walnut line of cases, by means of making an amended tax return, which the Minister was obliged to recognize because of objection or appeal rights that the particular taxpayer had preserved. The designation in subsection 89(14) requires that written notification be given on or before a specified date to persons other than the Minister, in this case to shareholders of the corporation who receive any portion of the dividend that is to be designated. If a corporation gives written notice to a shareholder of an eligible dividend designation after the date provided for in subsection 89(14), there is no mechanism available to cure the defective notice, as there is where an amended tax return may be filed. As well, as indicated in its supporting explanatory notes, it was the clear intention of the Department of Finance when it introduced subsection 89(14) that the subsection not be capable of being made after the time provided for in the subsection.
As the designation provided for in subsection 89(14) must be made on or before the time of payment of the particular dividend, the designation cannot be made in this situation where, pursuant to subsection 184(3), after the time the dividend is paid an election is made to deem the dividend to have been a separate taxable dividend.
We trust that our comments will be of assistance.
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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