12 February 2010 External T.I. 2009-0340831E5 - GRIP

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: Can a dividend from a connected public corporation be added to a CCPC's GRIP under subsection 89(7)

Position: Yes

Reasons: Wording of the Act

									2009-034083
XXXXXXXXXX 								Henry Chong
(613) 957-2053
February 12, 2010

Dear XXXXXXXXXX :

Re: "GRIP"

This is in response to your letter dated September 11, 2009, in which you requested a technical interpretation on whether a dividend received by a Canadian-controlled private corporation ("CCPC") from a public corporation in the circumstances described in your letter can be added to the CCPC's general rate income pool ("GRIP") under subsection 89(7) of the Income Tax Act (Canada)(the "Act").

The situation that you have asked us to consider is as follows:

1. Publico is a public corporation and a taxable Canadian corporation as those terms are defined in subsection 89(1) of the Act;

2. Publico's only income for each of its taxation years ending after 2000 and before 2006 (the "transition period") was $XXXXXXXXXX of full rate taxable income as defined in subsection 123.4(1) of the Act, read without reference to subparagraphs 123.4(1)(a)(i) and (ii) for taxation years of the corporation ending after 2003 and before 2006, and before taking into consideration the specified future tax consequences for that year as defined in subsection 248(1) of the Act;

3. Publico had no non-capital losses for any taxation year preceding the transition period;

4. At all relevant times, Holdco was a CCPC as defined under subsection 125(7) of the Act;

5. Holdco owns shares of Publico. Publico was connected with Holdco within the meaning of subsection 186(4) of the Act at all times during the transition period;

6. During the transition period, Publico paid taxable dividends of $XXXXXXXXXX in aggregate. $XXXXXXXXXX of these dividends was paid to Holdco ($XXXXXXXXXX in each taxation year) and the remaining $XXXXXXXXXX was paid to other shareholders ($XXXXXXXXXX in each taxation year). The dividends were paid in proportion to each recipients shareholding interest in Publico;

7. The dividends received by Holdco from Publico in each year of the transition period were taxable dividends that were deductible in computing Holdco's income under subsection 112(1) of the Act;

8. Holdco did not pay any dividends in the transition period; and

9. Holdco and Publico had XXXXXXXXXX year ends during all of the years in question.

In your view, the dividends received by Holdco from Publico during the transition period can be included in computing Holdco's GRIP addition in 2006 under subsection 89(7) of the Act.

Our Comments

To the extent that your question relates to a particular transaction, you should note that 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. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The foregoing comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency.

In computing the 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 (the payor corporation) connected with the 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 view, the dividends received by Holdco from Publico during the transition period can be added to Holdco's GRIP under paragraph (c) of the formula in subsection 89(7) of the Act. The dividends paid by Publico to Holdco were taxable dividends which were deductible by Holdco in computing its taxable income under subsection 112(1) of the Act. Holdco was connected to Publico at all relevant times during the transition period. Finally, in the circumstances described in your letter and assuming no other relevant facts, it would be reasonable to consider that each dividend was attributable to an amount that would, if subsection 89(7) applied to Publico, be described in paragraphs (a) and (b) of the value for "A" in respect to Publico. For greater certainty, paragraph (c) of the formula in subsection 89(7) of the Act does not require that the dividend be paid by a corporation that was a CCPC.

We trust the foregoing is satisfactory. Our comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular IC 70-6R5, dated May 17, 2002.

Yours truly,

David Palamar
Manager
Corporate Reorganizations Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate