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 situation, two corporate shareholders (Bco and Cco) own a third corporation (Aco). Aco's element "A" of the 2006 GRIP Addition per subsection 89(7) is $1,000,000. In 2002, Aco paid a taxable dividend of $800,000 to Bco, and a taxable dividend of $700,000 to Cco. How should Aco's element "A" of $1,000,000 be allocated between Bco and Cco in computing the amount that would be included in paragraph (c) of element "A" for Bco and Cco.
Position: Bco: $533,333, and Cco: $466,667.
Reasons: The amount of element "A" of $1,000,000 of Aco should be apportioned between Bco and Cco based on the amount of the dividends received by Bco and Cco from Aco during taxation years ending after 2000 and before 2006.
2008-029411
XXXXXXXXXX G. Gladu
(613) 946-5344
November 27, 2008
Dear XXXXXXXXXX :
Re: Technical Interpretation Request - General Rate Income Pool Addition
This is in reply to your e-mail of September 22, 2008 in which you requested our views on the application of subsection 89(7) of the Income Tax Act (the "Act") in the situation described below.
Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.
1) The situation:
a) Aco had $200,000 of "full rate taxable income" (as defined under subsection 123.4(1)) at 63% for each taxation year ending after 2000 and before 2006 (paragraphs (a) and (b) of element "A" of the formula in subsection 89(7)).
b) In 2002, Aco paid a dividend of $800,000 to Bco which was deductible under subsection 112(1) in computing the corporation's taxable income for the relevant taxation year.
c) In 2004, Aco paid a dividend of $700,000 to Cco which was deductible under subsection 112(1) in computing the corporation's taxable income for the relevant taxation year.
d) Bco and Cco were, at any relevant time, connected with Aco within the meaning assigned by subsection 186(4).
e) In this situation, we are assuming that Aco, Bco and Cco were, at any relevant time, "Canadian-controlled private corporations" ("CCPC") as defined under subsection 125(7). We are also assuming that paragraph (c) of element "A" of the formula in subsection 89(7) in respect of Aco is nil.
2) Your question:
You request our comments on how to allocate element "A" of the formula in subsection 89(7) of Aco between Bco and Cco, in computing the amount that would be described in paragraph (c) of element "A" of the formula contained in subsection 89(7), for each of these corporations.
3) Our Comments:
The particular circumstances in your letter, on which you have asked for our views, appear to be a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to provide the following general comments, which may be of assistance.
In computing the "general rate income pool" ("GRIP") of a corporation that was a CCPC throughout its first taxation year that includes any part of January 1, 2006, the corporation's GRIP at the end of its immediately preceding taxation year is deemed to be the greater of nil and the amount determined by the formula "A-B" in subsection 89(7). The value for "A" in the formula is the total of the amounts described in paragraphs (a), (b) and (c).
In general terms, the amounts described in paragraphs (a) and (b) of the value for "A" will reflect 63% of the total of the corporation's "full rate taxable income" for each taxation year of the corporation ending after 2000 and before 2006, with certain modifications depending on the taxation year in question, determined before taking into consideration the specified future income tax consequences for the year.
The amount determined under paragraph (c) is the total of all amounts each of which is deductible under subsection 112(1) in computing the corporation's taxable income in respect of taxable dividends received from another corporation connected with the corporation (the "payer corporation"), to the extent that it is reasonable to consider, having regard to all the circumstances, that the dividend was attributable to an amount that is, or would be if subsection 89(7) applied to the payer corporation, described in paragraphs (a), (b) or (c) of the value for "A" in respect of the payer corporation.
In our response to Round Table question 1 at the 2008 APFF Conference, we mentioned that the CRA will generally consider reasonable, for each corporation that is connected to the payer corporation at the relevant time during the relevant period, that each such corporation be entitled to its proportionate share of element "A" of the formula in subsection 89(7) of the payer corporation, based on the amount of dividends received by these corporations from the payer corporation during the relevant period. A similar position was also taken in Technical Interpretation 2007-0263001E5.
In the situation you described, we would generally consider that the respective share of element "A" of Aco that Bco and Cco would be entitled to under subsection 89(7), would correspond to the product obtained by multiplying $1,000,000 ($200,000 x 5) by the quotient obtained by dividing the total of the dividends received by Bco or Cco during the relevant period, as the case may be, by the total of the dividends paid by Aco during the relevant period ($1,500,000). Consequently, in the situation you described, the amount that would be included in paragraph (c) of element "A" under subsection 89(7) would correspond to $533,333 ($1,000,000 x ($800,000/$1,500,000)) for Bco and $466,667 ($1,000,000 x ($700,000/$1,500,000)) for Cco.
We trust that our comments will be of assistance. However, as stated in paragraph 22 of Information Circular 70-6R5, the opinion expressed in this letter is not a ruling and consequently is not binding on the Canada Revenue Agency.
Yours truly,
Stéphane Prud'homme, LL.B, M. Fisc.
Manager
Mergers and Acquisitions Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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