28 November 2010 CTF Roundtable Q. 5, 2010-0385991C6 - 2010 CTF - Q. 5 - 55(2) and 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: (i) Where a CCPC pays an eligible dividend across a single class of shares owned 50/50 by a Canadian resident individual and a Canadian resident CCPC, both of whom are not related, can the CRA confirm that there is no reduction in the payer CCPC's GRIP in respect of an eligible dividend for the portion of the dividend that subsection 55(2) applies to, where the dividend exceeds the safe income attributable to the shares owned by the recipient CCPC? (ii) If the recipient CCPC does not file a designation pursuant to paragraph 55(5)(f), can the CRA confirm that there is no reduction of the payer CCPC's GRIP in respect of the 50% portion of the dividend paid to the recipient CCPC? (iii) If the recipient CCPC files a designation pursuant to paragraph 55(5)(f) whereby it is deemed to have received two separate dividends, one in the amount of the safe income attributable to the shares on which the dividend was paid, and the other for the balance of the payment, can the CRA confirm that there is a reduction of the payer CCPC's GRIP equal to the aggregate of the full amount of the eligible dividend received by the individual shareholder and the portion of the dividend received by the recipient CCPC that was subject to an election pursuant to paragraph 55(5)(f) and equal to the safe income attributable to the shares on which the dividend was paid?

Position: No. In all cases there would be a reduction of the payer CCPC's GRIP at the end of the taxation year following the year in which the corporation would have paid an eligible dividend, equal to the full amount of the eligible dividend declared pursuant to subsection 89(14), in accordance with subparagraph (a)(i) of element "G" of the definition of GRIP in subsection 89(1).

Reasons: In accordance with the provisions of the ITA.

Canadian Tax Foundation 2010 CRA Roundtable
November 28, 2010

Subsection 55(2) and GRIP

Question 5

At the Society of Trust and Estate Practitioners' 2007 conference round table, the CRA expressed the view that there will be a permanent depletion of a corporation's general-rate income pool (GRIP) where subsection 55(2) applies to an intercorporate dividend that exceeds safe income on hand.(note 1) Because subsection 55(2) applies only to the dividend recipient, a disconnect results. In the CRA's view, the tax treatment of the dividend to the recipient has no bearing on the computation of the GRIP of the payer. The CRA has stated that it will generally accept that the dividend recipient can add to its GRIP the part of the dividend that is covered by safe income, provided that the dividend recipient made or makes a designation under paragraph 55(5)(f).

The CRA's interpretation of item G of the GRIP definition appears to be incorrect. Item G reduces the dividend payer's GRIP by the amount of eligible dividends paid by the corporation in its preceding taxation year. However, paragraph (a) of the definition of "eligible dividend" in subsection 89(1) requires that the dividend be received by a person resident in Canada. If subsection 55(2) has deemed the payment not to be a dividend received by the payee, then this requirement will not be met. In fact, the CRA has accepted this interpretation with respect to eligible dividends that are, in part, paid to non-residents.(note 2)

Can the CRA confirm that when a Canadian-controlled private corporation (CCPC) pays an eligible dividend across a single class of shares owned 50-50 by a Canadian-resident individual and a Canadian-resident CCPC, both of which are not related, there is no reduction in the GRIP of the payer CCPC in respect of an eligible dividend for the portion of the dividend that subsection 55(2) applies to, where the dividend exceeds the safe income attributable to the shares owned by the recipient CCPC?

Can the CRA confirm that if the recipient CCPC does not file a designation pursuant to paragraph 55(5)(f), there is no reduction of the payer CCPC's GRIP in respect of the 50 percent portion of the eligible dividend paid to the recipient CCPC?

Can the CRA confirm that if the recipient CCPC files a designation pursuant to paragraph 55(5)(f) whereby it is deemed to have received two separate dividends—one in the amount of the safe income attributable to the shares on which the dividend was paid, and the other for the balance of the payment—there is a reduction of the payer CCPC's GRIP equal to the aggregate of the full amount of the eligible dividend received by the individual shareholder and the portion of the dividend received by the recipient CCPC that was subject to an election pursuant to paragraph 55(5)(f) and equal to the safe income attributable to the shares on which the dividend was paid?

Response 5

In each of the foregoing situations, it continues to be the position of the CRA that the GRIP of the payer CCPC at the end of the taxation year that follows the year in which the corporation would have paid the eligible dividend must be reduced by the full amount of the eligible dividend designated under subsection 89(14), in accordance with subparagraph (a)(i) of element G in the definition of GRIP in subsection 89(1).

We believe, as was expressly stated at the 2008 APFF Conference,(note 3) that our interpretation of the provisions of the definition of "eligible dividend" in subsection 89(1) and the provisions of subsection 55(2) is in accordance with a textual, contextual, and purposive analysis of those provisions, the purpose of which is to find a meaning that is harmonious with the Act as a whole, as mandated by the Supreme Court of Canada (SCC) in Canada Trustco Mortgage Co. v. Canada. (note 4)

Furthermore, at the time that the dividend is paid by the payer CCPC and received by the recipient CCPC, the dividend is a taxable dividend that is received by a person resident in Canada for the purposes of the application of the definition of "eligible dividend" in subsection 89(1) to the payer corporation, and for the purposes of computing the GRIP of the payer corporation, although this dividend is also received by a corporation resident in Canada in respect of which the latter corporation is entitled to a deduction, pursuant to subsection 112(1), for the purposes of the application of subsection 55(2) to the dividend recipient. In other words, the effect of the deeming provision in paragraph 55(2)(a) should be limited to the dividend recipient and should have no bearing on the computation of the GRIP of the payer CCPC.

It appears to us that to interpret the word "received" out of context for the purposes of computing the GRIP of the payer corporation by considering the potential tax consequences of a corporation that is the recipient of the dividend would be contrary to the overall tax policy of the legislator, who intends that tax law be certain and predictable in order that the payer corporation can organize its business intelligently and calculate its GRIP in accordance with the dividends that it paid to persons resident in Canada.

Finally, you referred to our position concerning the computation of the GRIP of a payer CCPC when a portion of a dividend designated an "eligible dividend" pursuant to subsection 89(14) is in part paid to non-residents.(note 5) In our view, at the time that the dividend designated an "eligible dividend" under subsection 89(14) is paid, the payer CCPC would be able to ascertain that the portion of the dividend that is paid to non-resident shareholders would not be a dividend received by a person resident in Canada, in accordance with subparagraph (a)(i) of element G of the definition of GRIP and the definition of "eligible dividend" in subsection 89(1). In light of this and the statements above, we believe that our interpretation of the definition of "eligible dividend" for the purposes of the computation of GRIP and subparagraph (a)(i) of element G of the formula is consistent in each of the situations described above.

Notes:

1. CRA document no. 2007-0233771C6, June 8, 2007.
2. See the CRA's response to question 6 at the 2008 Association de planification fiscale et financière du Québec (APFF) conference; CRA document no. 2008-0284951C6, October 10, 2008.
3. See the CRA's response to question 7 at the 2008 APFF conference; CRA document no. 2008-0284961C6, October 10, 2008.
4. 2005 SCC 54.
5. Supra note 2.

Sandra Snell
2010-038599