9 December 2008 TEI Roundtable Q. 2, 2008-0300381C6 - Eligible Dividend Designations

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: Would CRA consider extending the administrative relief to the designation requirements of subsection 89(14) of the ITA as provided to public corporations, to Canadian-controlled private corporations ("CCPC")?

Position: No.

Reasons: In accordance with a previously issued technical interpretation, we have found that the main tax policy objective for the written and contemporaneous designation requirements in subsection 89(14) is the entitlement of dividend recipients to certainty regarding the tax consequences of corporate distributions. Furthermore, late designations are not permitted under subsection 89(14) pursuant to section 600 of the Income Tax Regulations, which also supports the view that Parliament intended to provide taxpayers with certainty as to the tax implications of corporate distributions. In our view, there are valid and compelling reasons to provide administrative relief to public corporations from the statutory designation requirements in respect of public corporations. First, most public corporations face a potentially significant burden associated with providing written and contemporaneous notification of each eligible dividend to its numerous shareholders. In addition, there are fundamental differences in the eligible dividend regime applicable to the CCPCs and the one applicable to public corporations. For example, a non-CCPC, which is required to calculate its low-rate income pool ("LRIP") at the time that it designates an eligible dividend, is unrestricted in its capacity to designate eligible dividends, to the extent the it does not have an LRIP balance. Furthermore, a CCPC must have a general rate income pool ("GRIP") balance at the end of the year in order to designate an eligible dividend and avoid an excessive eligible dividend designation ("EEDD"), whereas a non-CCPC must not have an LRIP balances to designate eligible dividends without penalty. Moreover, it is our understanding that most public corporations generally will not have an LRIP balance. Thus, our administrative position with respect to public corporations is intended to alleviate certain administrative hardships vis-à-vis the designation requirements, while continuing to preserve the dividend recipient's entitlement to certainty with respect to the tax implications of corporate distributions. We are unable to apply the same reasoning to CCPCs and non-CCPCs, other than public corporations.

Tax Executive Institute/CRA Liaison Meeting
December 9, 2008

Question 2 Eligible Dividend Designations

In technical interpretation 2007-0249941E5 (May 2, 2008), CRA was asked whether the following notice to a sole shareholder of a particular class of shares of a Canadian-controlled private corporation ("CCPC") (referred to as "Canco") would meet the designation requirement for an eligible dividend:

We are writing on behalf of Canco to inform you that the directors of Canco have determined that an eligible dividend will be paid to you today by Canco by credit to your shareholder's loan account with Canco. 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 Canco, and the amount in the general rate income pool (as that term is defined in subsection 89(11) of the Income Tax Act) of Canco on that date.

In addition, the taxpayer asked whether the following notification would suffice where more than one shareholder owns a particular class of shares of a CCPC:

We are writing on behalf of Canco to inform you that the directors of Canco 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 Canco on Year-end date of the Canco. The dividend will be paid to you by Canco by credit to your shareholder's loan account with the company.

Under the eligible dividend rules, a designation is made by notifying shareholders in writing that a dividend is eligible when paid. The notifications in this case clearly state that the full amount of the dividend paid will be an "eligible dividend." The technical interpretation, however, concludes that the proposed shareholder notifications failed the requirements of subsection 89(14) because they did not specify the amount of the "eligible dividends" to each shareholder when paid. Under this interpretation, a simple statement by a CCPC that a dividend will not exceed the company's general rate income pool ("GRIP") will seemingly not satisfy the designation requirement for eligible dividends.

The position in the technical interpretation seems unduly stringent in light of the published guidelines 1 for the designation of eligible dividends, including those for public companies. By imposing a quantification requirement for each shareholder's dividend, the interpretation creates a compliance challenge for private companies thereby increasing compliance costs and the risk of non-compliance. 2 Would CRA consider revising interpretation 2007-0249941E5 to make the compliance requirements for CCPCs consistent with those for public companies?

CRA Response

Background

Subsection 89(14) provides that a corporation designates a dividend it pays at any time to be an eligible dividend by notifying in writing at that time each person or partnership to whom it pays all or any part of the dividend that the dividend is an eligible dividend.

In technical interpretation 2007-0249941E5 we were asked to consider the scope to be given to the designation requirements in section 89(14), in respect of certain proposed notification models for a CCPC. Applying a textual, contextual and purposive approach as established in Canada Trustco Mortgage Co. v. Canada, 2005 DTC 5523 (SCC), we found that the need to provide taxpayers with certainty regarding the tax consequences associated with corporate distributions was the main tax policy objective underlying the legislation of a written and contemporaneous designation requirement in subsection 89(14).

In reaching our conclusion, we also noted that Parliament has not provided corporations with the ability to make a late designation under subsection 89(14) pursuant to section 600 of the Income Tax Regulations. It is our position that this fact further supports the view the designation requirements are intended to provide taxpayers with certainty as to their dividend receipts at the time of corporate distribution.

On December 20, 2006, we issued a News Release titled "Designation of Eligible Dividends" (Document 2006-021789Z0), wherein we outlined general guidelines for corporations for purposes of the designation requirements.

In this news release, we stated our intention to provide public corporations with administrative relief from the statutory designation requirements in subsection 89(14). Specifically, we stated, among other things, the following:

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 dividend 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.

Similar relief from the statutory application of the designation requirements was not extended to CCPCs or non-CCPCs, other than public corporations.

Analysis

The foregoing continues to be the position of the CRA. We are of the opinion that valid and compelling reasons exist for providing administrative relief solely to public corporations with respect to the designation requirements in subsection 89(14), for 2007 and subsequent taxation years. This administrative relief for public corporations will, among other things, reduce the potential burden associated with providing written and contemporaneous notification to hundreds or even thousands of shareholders. Furthermore, we believe that this administrative relief will not impact the need for taxpayer certainty in light of the practical application of the eligible dividend rules for public corporations.

It is worthwhile, at this point, to re-iterate the marked differences in determining eligible dividends for non-CCPCs (of which a public corporation is a subset) versus CCPCs.

First of all, for CCPCs, the capacity to designate an eligible dividend is generally restricted to the balance in the CCPC's "general rate income pool" ("GRIP"), as calculated at the end of the particular taxation year. In broad terms, GRIP is defined as a CCPC's income which has been subject to the general rate of tax (or, in other words, income that has not benefited from a special rate of tax), eligible dividends received from another Canadian corporation and dividends received from foreign affiliates and deducted in computing taxable income.

On the other hand, a non-CCPC is required to calculate its "low-rate income pool" ("LRIP") at the time that it designates an eligible dividend. The definition of LRIP is generally limited to a non-CCPC's income that has benefited from the small business deduction, plus any non-eligible dividends that the corporation has received. Unlike a CCPC, a non-CCPC is unrestricted in its capacity to designate eligible dividends, to the extent that it does not have an LRIP balance.

A fundamental difference in the two eligible dividend regimes is that a CCPC must have a GRIP balance at the end of the year in order to designate an eligible dividend and avoid an excessive eligible dividend designation ("EEDD"), whereas a non-CCPC must not have an LRIP balance to designate eligible dividends without penalty. Moreover, it is our understanding that most public corporations will generally not have an LRIP balance.

Consequently, dividends paid by a public corporation should generally be eligible dividends. Thus, our administrative position with respect to public corporations is intended to alleviate certain administrative hardships vis-à-vis the designation requirements, while continuing to preserve the dividend recipient's entitlement to certainty with respect to the tax implications of corporate distributions.

Finally, we note that we have not extended the aforementioned administrative relief to non-CCPCs, other than public corporations, because of the significant differences that exist between these corporations and public corporations in the context of applying the eligible dividend regime. For example, it is our understanding that for various reasons, non-CCPCs, other than public corporations, may have significant LRIP balances. Furthermore, in most cases, the number of shareholders of non-CCPCs (other than public corporations) will not be so numerous as to impose a similar burden to that of public corporations, in providing its shareholders with written and contemporaneous notification of each eligible dividend designation.

ENDNOTES

1 Canada Revenue Agency Views, Other Document 2006-0217891Z0 - Designation of Eligible Dividends (December 20, 2006).

2 A public company can satisfy the requirement of designating an eligible dividend by stating before or at the time dividends are paid that all dividends are eligible unless indicated otherwise; no quantification of an amount is necessary.