23 December 2008 External T.I. 2008-0271401E5 F - GRIP/CRTG

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89(1), 55(2), 55(5)(f)

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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 situation where, in a particular taxation year, Bco receives from its wholly-owned subsidiary (Aco) two taxable dividends (the first, an eligible dividend of $3.5 million and a second of $1.5 million), the two taxable dividends are subject to the application of subsection 55(2), and, Bco has designated the first taxable dividend to be two separate taxable dividends of $3 million (the amount of the safe income on hand attributable to the gain on its shares) and another of $500,000, pursuant to paragraph 55(5)(f), whether Bco could include the first taxable dividend in computing its GRIP even though the said taxable dividend is subject to paragraph 55(2)(a)?

Position: No. Bco could include in its GRIP only $3 million.

Reasons: Previous position reiterated.

XXXXXXXXXX 								2008-027140
									Marc LeBlond
December 23, 2008

Dear Madam,

Subject: Computing the general rate income pool

This is in response to your letter of March 7, 2008, in which you asked for our comments on the above subject in relation to the situation described below. We apologize for the delay in responding to your request.

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

It appears to us that the situation described in your letter and summarized below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments that may be of assistance to you. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all the facts relating to a particular situation. Accordingly, and given that your letter only summarily describes a given hypothetical situation, the comments we make below may not fully apply in a particular given situation.

The Situation

Aco and Bco were incorporated under Part 1A of the Québec Companies Act.
Aco and Bco have the same taxation year-end.
Aco and Bco are "taxable Canadian corporations", as defined in subsection 89(1), and "Canadian-controlled private corporations", as defined in subsection 125(7).
Bco has always held 100% of the capital stock of Aco, being all of the common shares thereof.
At all relevant times, Aco has not had "refundable dividend tax on hand", as defined in subsection 129(3).
The balance in the "general rate income pool" ("GRIP"), as defined in subsection 89(1), at the end of a particular taxation year of Aco is $3.5 million.
At the end of that particular taxation year, Aco pays two taxable dividends to Bco: the first for $3.5 million, which Aco designates as an eligible dividend pursuant to subsection 89(14), and the second for $1.5 million. Bco is entitled to a deduction pursuant to subsection 112(1) in respect of these two taxable dividends received from Aco.
Both dividends received by Bco from Aco are subject to the application of subsection 55(2).
The safe income on hand attributable to the shares of Aco held by Bco before the "safe income determination time" (as defined in subsection 55(1)) is $3 million. Bco has designated $3 million and $500,000 as separate taxable dividends under paragraph 55(5)(f) in respect of the $3.5 million taxable dividend.
As a result of the application of subsection 55(2), Bco must report a taxable dividend of $3 million and a capital gain of $2 million on its return of income for the particular taxation year. The $2 million capital gain results from the fact that $500,000 of the first taxable dividend of $3.5 million it received and the taxable dividend of $1.5 million it received are deemed not to be dividends received by Bco, by virtue of paragraph 55(2)(a), and are deemed to be a gain of Bco from the disposition of a capital property for its particular taxation year, by virtue of paragraph 55(2)(c).

2005 Total
Your Question and Comments

You asked, as to the particular situation, whether Bco could include in computing its GRIP, the full amount of the $3.5 million eligible dividend it received from Aco despite a portion of this amount being deemed not to be a taxable dividend through the application of subsection 55(2).

In your view, "The amount received by Bco is clearly a dividend as shown in its financial statements, and it is only through the application of an anti-avoidance tax rule that a portion of this amount is recharacterized in some way as a capital gain."

Our Comments

We are of the view that Bco would not be able to include in computing its GRIP the full amount of the $3.5 million eligible dividend it received from Aco. However, Bco could include $3 million in its GRIP pursuant to paragraph (a) of Element G of the formula for calculating the GRIP. Our conclusions are based on the following observations.

For the purposes hereof, the relevant parts of the GRIP definition read as follows:

general rate income pool at the end of a particular taxation year, of a taxable Canadian corporation that is a Canadian-controlled private corporation or a deposit insurance corporation in the particular taxation year, is the positive or negative amount determined by the formula

A - B

where

A

is the positive or negative amount that would, before taking into consideration the specified future tax consequences for the particular taxation year, be determined by the formula

C + 0.68(D - E - F) + G + H - I

[...]

G is the total of all amounts each of which is

(a) an eligible dividend received by the corporation in the particular taxation year,

[...]
[Emphasis added]

It follows from the above passage in the GRIP definition that a Canadian-controlled private corporation may include in computing its GRIP at the end of a particular taxation year an eligible dividend received by it in the particular year under paragraph (a) of G of the formula for calculating the GRIP.

Subsection 55(2) refers to a corporation that has received a taxable dividend and, if applicable, the amount of such dividend "shall be deemed not to be a dividend received by the corporation" by virtue of paragraph 55(2)(a).

We are of the view that where paragraph 55(2)(a) applies to a taxable dividend received by a corporation, the dividend cannot be included in computing the corporation's GRIP. However, the Canada Revenue Agency (the "CRA") accepts that the portion of the dividend that may be considered safe income on hand attributable to the gain on the shares may be included in the GRIP of the corporation receiving the dividend if the corporation has designated or designates such amount as a separate taxable dividend under paragraph 55(5)(f).

Indeed, the CRA adopted this position in its response to CRA Roundtable Question 13 at the 9th National Conference of the Society of Trust and Estate Practitioners (STEP) Canada on June 8, 2007, as follows:

Question No. 13: Application of 55(2) and GRIP calculation

If applicable, subsection 55(2) of the ITA will deem an otherwise tax-free intercorporate dividend received by a corporation to not be a dividend received by the corporation (see paragraph 55(2)(a)). If the payer corporation had designated the dividend to be an "eligible dividend" pursuant to subsection 89(14), the recipient (assuming the recipient is a Canadian-controlled private corporation) would have included the eligible dividend into its general rate income pool ("GRIP") pursuant to element "G" of the definition of GRIP in subsection 89(1) of the ITA. Given the language in paragraph 55(2)(a), it would appear that the recipient corporation will not have an addition to its GRIP but the payer's GRIP would be depleted (see element "I" of the definition of GRIP in subsection 89(1)). If our understanding is correct, this would appear to be a permanent depletion of GRIP in circumstances where subsection 55(2) of the ITA would apply. Can the CRA confirm our understanding.

CRA Response:

When a Canadian-controlled private corporation ("CCPC") designates a dividend it pays to its shareholders to be an eligible dividend pursuant to subsection 89(14) of the ITA, the GRIP of the payer CCPC would effectively be reduced permanently. This is so because element I of the definition of GRIP in subsection 89(1) of the ITA stipulates that the amount of any eligible dividend paid by a corporation in its preceding taxation year must be deducted in the computation of its GRIP. In fact, the tax treatment of the dividend to the recipient CCPC has no bearing on the computation of the GRIP of the payer CCPC.

As far as the CCPC recipient is concerned, the CRA would generally accept that the recipient CCPC adds to its GRIP the part of the dividend that is covered by safe income (the "safe dividend"), provided that the CCPC recipient made or makes a designation under paragraph 55(5)(f) of the ITA in order that the safe dividend be considered a separate taxable dividend.

In light of the foregoing, in the situation you have submitted to us, we believe that Bco could only include an amount of $3 million in computing its GRIP at the end of the particular taxation year.

Best regards,

Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industry Section
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.

Position: No. Bco could include in its GRIP only $3 million.

Reasons: Previous position reiterated.

XXXXXXXXXX 								2008-027140
									Marc LeBlond
Le 23 décembre 2008

Madame,

Objet: Calcul du compte de revenu à taux général

La présente est en réponse à votre lettre du 7 mars 2008 dans laquelle vous nous avez demandé nos commentaires sur le sujet mentionné 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 ").

Il nous apparaît que la situation décrite dans votre lettre et ci-après résumée pourrait constituer une situation réelle impliquant des contribuables. Comme l'explique la Circulaire d'information 70-6R5, la présente Direction n'a pas comme pratique de fournir des observations sur les opérations envisagées concernant des contribuables précis autrement que sous la forme d'une décision anticipée en matière d'impôt sur le revenu. Si votre situation concernait des contribuables précis et une ou des opérations réalisées, vous devriez soumettre tous les faits et documents pertinents au bureau des services fiscaux approprié afin d'obtenir son opinion. Toutefois, nous sommes en mesure de vous offrir les commentaires généraux suivants qui pourraient vous être utiles. Il est à noter que l'application d'une ou de plusieurs dispositions de la Loi nécessite généralement l'analyse de tous les faits se rapportant à une situation particulière donnée. En conséquence et compte tenu du fait que votre lettre ne décrit que sommairement une situation hypothétique donnée, les commentaires que nous formulons ci-après pourraient ne pas s'appliquer intégralement dans une situation particulière donnée.

La situation

Société A et Société B ont été constituées en vertu de la Partie 1A de la Loi sur les compagnies du Québec.
Société A et Société B ont la même fin d'année d'imposition.
Société A et Société B sont des " sociétés canadiennes imposables ", au sens prévu au paragraphe 89(1), et des " sociétés privées sous contrôle canadien ", au sens prévu au paragraphe 125(7).
Société B a toujours détenu 100 % du capital-actions de Société A, soit la totalité des actions ordinaires du capital-actions de Société A.
À tout moment pertinent, Société A n'a pas d'" impôt en main remboursable au titre de dividendes ", au sens prévu au paragraphe 129(3).
Le solde du " compte de revenu à taux général " (ci-après " CRTG "), au sens prévu au paragraphe 89(1), à la fin d'une année d'imposition donnée de Société A est de 3,5 millions $.
À la fin de cette année d'imposition donnée, Société A verse à Société B deux dividendes imposables : un premier de 3,5 millions $ que Société A désigne à titre de dividende déterminé, en vertu du paragraphe 89(14), et un deuxième de 1,5 million $. Société B a droit à une déduction, en vertu du paragraphe 112(1), à l'égard de ces deux dividendes imposables reçus de Société A.
Les deux dividendes reçus par Société B de Société A sont visés par l'application du paragraphe 55(2).
Le revenu protégé en main attribuable aux actions de Société A détenues par Société B, avant le " moment de détermination du revenu protégé ", au sens prévu au paragraphe 55(1), est de 3 millions $. Société B a désigné des montants de 3 millions $ et de 500 000 $, en vertu de l'alinéa 55(5)(f), comme étant des dividendes imposables distincts à l'égard du dividende imposable de 3,5 millions $.
En raison de l'application du paragraphe 55(2), Société B doit déclarer dans sa déclaration de revenu, pour l'année d'imposition donnée, un dividende imposable de 3 millions $ et un gain en capital de 2 millions $. En effet, le gain en capital de 2 millions $ résulte du fait que 500 000 $ du premier dividende imposable de 3,5 millions $ qu'elle a reçu ainsi que le dividende imposable de 1,5 million $ qu'elle a reçu sont réputés ne pas être des dividendes reçus par Société B, en vertu de l'alinéa 55(2)a), et sont réputés être un gain de Société B provenant de la disposition d'une immobilisation pour son année d'imposition donnée, en vertu de l'alinéa 55(2)c).

2005 Total
Votre question et vos commentaires

Vous nous demandez, dans la situation donnée, si Société B pourrait inclure dans le calcul de son CRTG, le plein montant du dividende déterminé de 3,5 millions $ qu'elle a reçu de Société A malgré qu'une partie de ce montant soit réputée ne pas être un dividende imposable en raison de l'application du paragraphe 55(2).

D'après vous, " Le montant reçu par Société B est clairement un dividende tel qu'il appert dans ses états financiers, ce n'est que par l'application d'une règle fiscale anti-évitement qu'une partie de ce montant est recaractérisée en quelque sorte en gain en capital. "

Nos commentaires

À notre avis, Société B ne pourrait pas inclure dans le calcul de son CRTG, le plein montant du dividende déterminé de 3,5 millions $ qu'elle a reçu de Société A. Cependant, Société B pourrait inclure 3 millions $ dans son CRTG, en vertu de l'alinéa a) de l'élément G de la formule du calcul du CRTG. Nos conclusions sont fondées sur les observations suivantes.

Pour les fins de la présente, les parties pertinentes de la définition de CRTG se lisent comme suit :

Le compte de revenu à taux général, à la fin d'une année d'imposition donnée, d'une société canadienne imposable qui est une société privée sous contrôle canadien ou une compagnie d'assurance-dépôts au cours de cette année correspond à la somme positive ou négative obtenue par la formule suivante :

A - B

où :

A représente la somme positive ou négative obtenue par la formule ci-après, avant la prise en compte des conséquences fiscales futures déterminées pour l'année donnée :

C + 0,68(D - E - F) + G + H - I

[...]

G le total des sommes représentant chacune :

a) un dividende déterminé reçu par la société au cours de l'année donnée,

[...]
[Soulignement ajouté]

Il ressort du passage précité de la définition du CRTG qu'une société privée sous contrôle canadien peut inclure dans le calcul de son CRTG à la fin d'une année d'imposition donnée un dividende déterminé reçu par elle au cours de l'année donnée, en vertu de l'alinéa a) de l'élément G de la formule du calcul du CRTG.

Le paragraphe 55(2) vise une société qui a reçu un dividende imposable et, s'il s'applique, le montant dudit dividende " est réputé ne pas être un dividende reçu par la société ", selon l'alinéa 55(2)a).

Nous sommes d'avis que, lorsque l'alinéa 55(2)a) s'applique à un dividende imposable reçu par une société, le dividende ne peut être inclus dans le calcul du CRTG de la société. Cependant, l'Agence du revenu du Canada (ci-après l'" ARC ") accepte que la partie du dividende qui peut être considérée comme du revenu protégé en main attribuable au gain sur les actions puisse être incluse dans le CRTG de la société bénéficiaire du dividende si cette dernière a désigné ou désigne un tel montant comme étant un dividende imposable distinct en vertu de l'alinéa 55(5)f).

D'ailleurs, l'ARC a adopté cette position dans sa réponse à la question 13 de la table ronde de l'ARC lors de la 9ième conférence nationale de la " Society of Trust and Estate Practitioners (STEP) Canada " le 8 juin 2007, énoncée comme suit :

Question No. 13: Application of 55(2) and GRIP calculation

If applicable, subsection 55(2) of the ITA will deem an otherwise tax-free intercorporate dividend received by a corporation to not be a dividend received by the corporation (see paragraph 55(2)(a)). If the payer corporation had designated the dividend to be an "eligible dividend" pursuant to subsection 89(14), the recipient (assuming the recipient is a Canadian-controlled private corporation) would have included the eligible dividend into its general rate income pool ("GRIP") pursuant to element "G" of the definition of GRIP in subsection 89(1) of the ITA. Given the language in paragraph 55(2)(a), it would appear that the recipient corporation will not have an addition to its GRIP but the payer's GRIP would be depleted (see element "I" of the definition of GRIP in subsection 89(1)). If our understanding is correct, this would appear to be a permanent depletion of GRIP in circumstances where subsection 55(2) of the ITA would apply. Can the CRA confirm our understanding.

CRA Response:

When a Canadian-controlled private corporation ("CCPC") designates a dividend it pays to its shareholders to be an eligible dividend pursuant to subsection 89(14) of the ITA, the GRIP of the payer CCPC would effectively be reduced permanently. This is so because element I of the definition of GRIP in subsection 89(1) of the ITA stipulates that the amount of any eligible dividend paid by a corporation in its preceding taxation year must be deducted in the computation of its GRIP. In fact, the tax treatment of the dividend to the recipient CCPC has no bearing on the computation of the GRIP of the payer CCPC.

As far as the CCPC recipient is concerned, the CRA would generally accept that the recipient CCPC adds to its GRIP the part of the dividend that is covered by safe income (the "safe dividend"), provided that the CCPC recipient made or makes a designation under paragraph 55(5)(f) of the ITA in order that the safe dividend be considered a separate taxable dividend.

Compte tenu de ce qui précède, dans la situation que vous nous avez soumise, nous croyons que Société B ne pourrait inclure qu'un montant de 3 millions $ dans le calcul de son CRTG à la fin de l'année d'imposition donnée.

Veuillez agréer, Madame, 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(1) - General Rate Income Pool - Element A - Element G

safe income dividend can be included in GRIP if designated as separate dividend

Bco receives, from its wholly-owned subsidiary (Aco), two taxable dividends (the first, designated as an eligible dividend of $3.5 million, for $1.5 million), both of which are subject to s. 55(2). Bco designates under s. 55(5)(f) the $3.5 million dividend to consist of: a dividend of $3 million (the amount of the safe income on hand attributable to the gain on its shares); and $500,000. Can Bco include the full $3.5 million taxable dividend in computing its GRIP even though it is subject to s. 55(2)?

In finding that Bco could only include $3 million in its GRIP pursuant to para. (a) of Element G of the GRIP formula. CRA stated:

[W]here paragraph 55(2)(a) applies to a taxable dividend received by a corporation, the dividend cannot be included in computing the corporation's GRIP. However, … CRA … accepts that the portion of the dividend that may be considered safe income on hand attributable to the gain on the shares may be included in the GRIP of the corporation receiving the dividend if the corporation … designates such amount as a separate taxable dividend under paragraph 55(5)(f).

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23 December 2008 External T.I. 2008-0271401E5 F - GRIP/CRTG

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