2 May 2008 External T.I. 2007-0249941E5 - Dividend designation

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: Whether a notification method that does not provide the amount of the dividend at the time it is paid to each shareholder meets the designation requirement stated in subsection 89(14) of the ITA

Position: No - the designation requirements stated in subsection 89(14) would not be met by the proposed notification methods

Reasons: A textual, contextual and purposive review of subsection 89(14) reveals that the taxpayer's entitlement to a written and contemporaneous notification each time a dividend is paid underlies Parliament's intent to provide dividend recipients with certainty regarding the tax consequences of corporate distributions.

								2007-024994
XXXXXXXXXX 							François Mathieu
(613) 948-2230
May 2, 2008

Dear XXXXXXXXXX ,

Re: Eligible dividend designation

This is in response to your request for a technical interpretation, dated June 21, 2007, in which you asked whether the following notification method to the sole shareholder of a particular class of shares of a Canadian-controlled private corporation ("CCPC") would meet the requirements stated in subsection 89(14) of the Income Tax Act ("ITA"):

" Year-end date of the Company

Address

Dear shareholder:

We are writing on behalf of Company to inform you that the directors of Company have determined that an eligible dividend will be paid to you today by Company by credit to your shareholder's loan account with Company. The dividend will be paid on your Class X shares. The total amount of the dividend paid will equal the lesser of the amount required to reduce your shareholder loan account to nil as at Year-end date of the Company, and the amount in the general rate income pool (as that term is defined in subsection 89(11) of the Income Tax Act) of Company on that date."

Where more than one shareholder own a particular class of shares of a CCPC, you would also like to know whether the following notification would meet the requirements stated in subsection 89(14) of the ITA:

" Year-end date of the Company

Address

Dear shareholder:

We are writing on behalf of Company to inform you that the directors of Company have determined that an eligible dividend will be paid to you today on your Class X shares. The total amount of the dividend paid will equal the amount in the general rate income pool (as that term is defined in subsection 89(11) of the Income Tax Act) of Company on Year-end date of the Company." The dividend will be paid to you by Company by credit to your shareholder's loan account with the Company."

Our comments

The statutory framework

The recipient of an "eligible dividend" is subject to an enhanced gross-up under paragraph 82(1)(b), but is entitled to claim an enhanced dividend tax credit pursuant to section 121 of the ITA.

In that regard, an "eligible dividend" is defined in subsection 89(1) as a "taxable dividend" that was: (i) paid by a corporation resident in Canada after 2005, and designated as an "eligible dividend" pursuant to subsection 89(14), and (ii) received by a person resident in Canada.

Furthermore, a CCPC is precluded from designating an eligible dividend in excess of its general rate income pool ("GRIP") at the end of the taxation year when such a dividend is paid. Any corporation that has made an "excessive eligible dividend designation" ("EEDD") will be subject to Part III.1 tax at a rate 20% of the EEDD 1 .

The scope of the designation requirement

In accordance with the principles of statutory interpretation established in Canada Trustco Mortgage Co. v. Canada 2005 DTC 5523 (SCC), we will review the wording, the statutory context and legislative purpose underlying subsection 89(14) to determine the scope to be given to the designation requirement stated in that provision.

Textual review

The wording of subsection 89(14) reveals the following requirements: (i) A designation must me made in writing; (ii) Each dividend recipient must be notified that a taxable dividend is an "eligible dividend" at the time it is paid, and (iii) A corporation must make a separate designation each time a taxable dividend is paid to its shareholders.

The recognition of a taxpayer's entitlement to a written and contemporaneous notification each time a dividend is paid underlies, in our view, Parliament's intent to provide dividend recipients with certainty regarding the tax consequences of corporate distributions.

Contextual review

The designation requirement is at the heart of the new regime, which entitles individual taxpayers to claim an enhanced dividend tax credit in respect of the "eligible dividends" they receive in a taxation year. However, a CCPC may be subject to Part III.1 when the "eligible dividends" are in excess of its GRIP. In both cases, it is imperative that the amount of "eligible dividends" be determined with certainty to properly assess the tax consequences arising from their payment.

One should also note that a corporation cannot make a late designation under subsection 89(14) pursuant to section 600 of the Income Tax Regulations. That further suggests Parliament's intention to disallow any method of written notification that does not provide dividend recipients with sufficient certainty regarding the tax consequences associated with corporate distributions.

Purposive review

The designation requirement applicable to the "eligible dividend rules" is apparently intended to provide certainty to investors about the tax implications of taxable dividends contemporaneously with the receipt of such corporate distributions.

In that regard, we believe that the need to provide investors with certainty regarding the tax consequences associated with corporate distributions must outweigh any administrative inconvenience resulting from the introduction of a contemporaneous designation requirement in subsection 89(14) of the ITA.

Conclusion

The proposed notification models listed above would not meet the requirements stated in subsection 89(14) by reason of their failure to provide each shareholder with the quantum of the "eligible dividends" received at the time they would be paid. It is not enough to provide that the eligible dividend will not exceed the lesser of the balance of the shareholder's loan account or the corporation's GRIP, or, alternatively, to state that the eligible dividends will not exceed the corporation's GRIP at the time of their payment. Although the "eligible dividends" to be distributed would arguably be determinable in such circumstances, we believe that a more stringent threshold is applicable to determine whether a notification method meets the designation requirement stated in subsection 89(14) of the ITA.

Yours truly,

Mark Symes
Manager
Corporate Reorganizations Section I
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES

1 The corporate payor may be subject to Part III.1 tax at a rate of 30% of the EEDD if it is reasonable to consider that the "eligible dividend" was paid in a transaction, or as part of a series of transactions, one of the main purposes of which was to artificially maintain or increase the corporation's GRIP