This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: A corporation (Aco) owns 40% of the shares of the capital stock of another corporation (Bco). Aco is a CCPC. Aco receives a dividend from Bco on January 10, 2001. On January 26, 2001, all of the shares of the capital stock of Bco are acquired by a non-resident. Bco's full rate taxable income for its taxation year beginning on January 1, 2001 and ending on January 25, 2001 is nil. In determining the amount to be included in the GRIP addition for 2006 of Aco, whether the dividend paid by Bco would be described in paragraph (c) of variable A in subsection 89(7).
Reasons: It is not reasonable to consider, having regard to all the circumstances, that the dividend was attributable to an amount that is described in paragraph (a), (b) or (c) of variable A in subsection 89(7) in respect of Bco.
December 19, 2012
Subject: Request for interpretation-- subsection 89(7)
This is in response to your email of November 5, 2012 in which you requested a technical interpretation of the application of subsection 89(7) of the Income Tax Act (the "Act") to the situation described below.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
It appears to us that the situation described in your email and summarized below could constitute an actual situation involving taxpayers. As explained in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than through advance income tax rulings. However, we are able to offer the following general comments that may be helpful to you. It should be noted that the application of one or more provisions of the Act generally requires the analysis of all facts relating to a particular situation. Accordingly, and in light of the fact that your email describes only very briefly the hypothetical particular situation, the comments we formulate below may not be fully applicable in a specific situation.
1) The Particular Situation
- Corporation A held 40% of the shares of the capital stock of Corporation B.
- The "fiscal period", as defined in subsection 249.1(1), of Corporation B ended on December 31st.
- Corporation A received a dividend of $4,000,000 from Corporation B on January 10, 2001. This dividend was deductible under subsection 112(1) in computing the taxable income of Corporation A. Corporation B was connected to Corporation A at the time of payment of the dividend.
- Corporation A was a "Canadian-controlled private corporation" ("CCPC") as defined in subsection 125(7) for taxation years ending after 2000 and before 2006 (the "Period").
- On January 26, 2001, all of the shares of the capital stock of Corporation B were sold to a U.S. corporation.
- For the short taxation year that began on January 1, 2001 and ended because of subsection 249(4) on January 25, 2001, the "full rate taxable income" within the meaning of subsection 123.4 (1) of Corporation B was nil.
- Corporation A did not have access to Corporation B's tax information after the disposition of the shares of the capital stock of Corporation B.
For the purpose of our comments, we have assumed that Corporation B did not receive any dividends, that were deductible pursuant to subsection 112(1), in its short taxation year beginning on January 1, 2001 and ending on January 25, 2001.
2) Your Questions
a) You asked us if we are of the view that our Directorate’s position in Technical Interpretation 2007-0250841E5 (the "Position") could apply in the particular situation.
b) To the extent that we determine that the Position could apply in the particular situation to include an amount by virtue of paragraph (c) of Element A of subsection 89(7) for purposes of calculating the gross-up of the general rate income pool ("GRIP") for Corporation A, you wish to know the process in order to obtain the necessary Corporation B tax information.
c) You wish to know if the CRA can deny the inclusion by Corporation A under paragraph 89(7)(A)(c) of Element A of the amount of the dividend it received from Corporation B because of the fact that it would be impossible for it to obtain information from Corporation B in the particular situation. You asked us if there is a fairness mechanism that Corporation A could access in the circumstances of the particular situation.
3) Our Comments
Briefly, pursuant to paragraphs (a) and (b) of Element A in subsection 89(7), a CCPC may add in its GRIP calculation an amount for its "full rate taxable income" as defined in subsection 123.4(1) for the Period. Subparagraph (c) refers to the CCPC's addition of a dividend that was deductible under subsection 112(1) in computing its taxable income for a taxation year that ended during of the Period and is in respect of a dividend it received from a corporation (referred to as the "payer corporation") that was, at the time it paid the dividend, connected (within the meaning assigned by subsection 186(4)) with the particular corporation. However, this addition is subject to a condition that it must be reasonable to consider, in the circumstances, that the dividend was attributable to an amount described to in paragraph (a), (b) or (c) of Element A in subsection 89 (7) in respect of the payer corporation.
In Interpretation 2007-0250841E5, our Directorate stated that in order to determine whether it is reasonable to consider that a dividend received by a CCPC is attributable to any of the amounts referred to in paragraphs (a) to (c) inclusive of Element A in subsection 89 7) in respect of a payer corporation, the total of the amounts included for the entire Period must be considered. This position is based, among other things, on the assumption that there is stability in the shareholding in the payer corporation throughout the Period.
In the particular situation, we are of the view that it is unreasonable to consider, given the circumstances (including the disposition by Corporation A of all the shares of the capital stock of Corporation B that it held at the time where the "full rate taxable income" of Corporation B was nil), that the dividend of $4,000,000 was attributable to an amount referred to in paragraphs (a), (b) or (c) of Element A in subsection 89(7) in respect of Corporation B.
We hope that our comments will be of assistance.
Stéphane Prud'Homme, Notary, M. Fisc.
Income Tax Rulings Directorate
and Regulatory Affairs Branch
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