16 March 2009 External T.I. 2009-0308511E5 - 89(1) - LRIP Computation

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: Assume that a non-Canadian-controlled private corporation ("non-CCPC") would pay a taxable dividend, that is designated as an "eligible dividend" pursuant to 89(14) of the Income Tax Act (the "Act"), in part, to shareholders who are non-resident of Canada. 1) Would the portion of the taxable dividend that is paid to the non-residents constitute a non-eligible taxable dividend? 2) If yes to question 1, at what time would the portion of the taxable dividend paid to the non-residents reduce the LRIP?

Position: 1) Yes. 2) Provided that, as a matter of law, the dividend becomes payable in the particular taxation year but before it is paid, the portion of such taxable dividend that is payable by the non-CCPC to the non-resident shareholders would be included under variable "G" of the definition of LRIP at the time the dividend is paid.

Reasons: Wording of the ITA.

								2009-030851
XXXXXXXXXX 							S.Snell
(613) 957-2095
March 16, 2009

Dear Sir:

Re: Computation of the Low Rate Income Pool ("LRIP") in Respect of Taxable Dividends Paid by a Non-Canadian-Controlled Private Corporation
("Non-CCPC") to Non-Resident Shareholders

We are writing in response to your letter dated January 30, 2009 in which you request our comments regarding the computation of LRIP as defined in subsection 89(1) of the Income Tax Act (the "Act") in respect of a taxable dividend, paid by a non-CCPC, that is designated as an "eligible dividend" pursuant to subsection 89(14) of the Act and is paid, in part, to shareholders who are non-residents of Canada. The first matter that you raise is whether the portion of the dividend that is paid to the non-residents would constitute a non-eligible taxable dividend and, thus, would reduce the non-CCPC's LRIP. The second matter to address is, assuming the LRIP would be so reduced, what is the time at which the LRIP would be reduced by that particular portion of the dividend paid to the non-residents.

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) Facts and Assumptions

Our understanding of the facts is as follows:

• There would be a non-CCPC which has both Canadian resident and non-resident shareholders.
• The non-CCPC would declare a taxable dividend on shares of the capital stock held by the resident and non-resident shareholders.
• The non-CCPC would designate the whole dividend as an "eligible dividend" pursuant to the requirements outlined in subsection 89(14).
• The non-CCPC would have a positive LRIP balance, prior to payment of the dividend, which would be less than the portion of the whole dividend payable on shares of the capital stock held by the non-resident shareholders.

2) Your Views

First Matter

It is your view that, with respect to the first matter, the portion of the whole taxable dividend that became payable to non-resident shareholders should reduce the corporation's LRIP for the following reasons.

Subsection 89(1) defines an "eligible dividend" at paragraph (a) as a taxable dividend that is received by a person resident in Canada, paid after 2005 by a corporation resident in Canada and designated, as provided under subsection (14), to be an eligible dividend.

Subsection 89(14) requires 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.

LRIP is defined in subsection 89(1) to be the amount, at any particular time in a particular taxation year, of a corporation (in the definition referred to as the "non-CCPC") that is resident in Canada and is in the particular taxation year neither a CCPC nor a deposit insurance corporation, and that is determined by the formula in that subsection. Pursuant to variable "G" of the formula, LRIP is reduced, among other things, by the total of all amounts each of which is a taxable dividend (other than, among other things, an eligible dividend) that became payable, in the particular taxation year but before the particular time, by the non-CCPC.

It is your view that, in respect of a "whole taxable dividend" designated by a corporation as an eligible dividend in accordance with subsection 89(14), that portion of the taxable dividend that is received by a non-resident of Canada cannot be an eligible dividend as defined in paragraph (a) of subsection 89(1) of the definition. Therefore, you contend that the portion of the whole taxable dividend designated as an eligible dividend by a non-CCPC that became payable to non-resident shareholders should be included under variable "G" of the definition of LRIP, thereby reducing the corporation's LRIP at the relevant time.

Furthermore, you suggest that the foregoing analysis and interpretation is consistent with our comments at the 2008 Association de planification fiscale et financière in respect of CCPCs, wherein we stated that the portion of a whole dividend designated as an eligible dividend by a CCPC that is paid to non-resident shareholders should not reduce the CCPC's general rate income pool ("GRIP").

Second Matter

With respect to the second matter, you indicate that subsection 89(1) defines an "excessive eligible dividend designation" ("EEDD") made by a non-CCPC in respect of an eligible dividend paid by the corporation at any time in a taxation year in paragraph (b) as, unless paragraph 89(1)(c) applies to the dividend, the amount, if any, determined by the formula described in that paragraph. Element "A" of such formula is the lesser of the total of all amounts each of which is an eligible dividend paid by the corporation at that time and the corporation's LRIP at that time. The LRIP is reduced, among other things, by all non-eligible taxable dividends that became payable in the particular taxation year but before the particular time that the dividend is paid. Consequently, you conclude that, at the time the eligible dividend is paid, which is a time after the dividend became payable, the non-CCPC's LRIP should be nil.

Furthermore, you submit that the words "became payable", as set out in variable "G" of the formula to calculate LRIP, should not be considered to have the same meaning as the word "paid". You note that Parliament used the former wording in the definition of LRIP and the latter in the definition of GRIP, which is a comparable provision within subsection 89(1). Therefore, you conclude that Parliament intended to give a distinct meaning to the words "became payable". Finally, it is your view that, logically, a dividend must become payable before it is paid.

You have requested that we provide our comments regarding the aforementioned analysis.

3) Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. The particular situation outlined in your letter appears to be a factual one, involving specific taxpayers and completed transactions. Accordingly, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we offer the following general comments.

We are generally in agreement with your conclusions in respect of the first matter. More specifically, where a non-CCPC designates a taxable dividend it pays as an eligible dividend pursuant to subsection 89(14), only the portion that is received by persons resident in Canada would constitute an eligible dividend. The portion of such taxable dividend received by non-residents would not constitute an eligible dividend.

With respect to the second matter, we note that, in regards to your statement that a dividend must logically become payable before it is paid, this issue is a question of law. However, provided that for legal purposes the dividend is payable before it is paid, we are generally in agreement with your conclusions on the second matter. More specifically, provided that, as a matter of law, the taxable dividend becomes payable in the particular taxation year but before the time that it is paid, the portion of such taxable dividend that is payable by the non-CCPC to the non-resident shareholders would be included under variable "G" of the definition of LRIP in subsection 89(1), at the time the dividend is paid.

Finally, we make no comment with respect to the potential application of paragraph (c) of the definition of EEDD in subsection 89(1) to the foregoing.

The above comments represent our general view with respect to the subject matter and are not binding on the CRA, as explained in paragraph 22 of Information Circular 70-6R5. We trust that the foregoing will be of assistance to you.

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