21 March 2013 External T.I. 2013-0476901E5 F - GRIP addition under 89(7)

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89(7)

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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: (1) A corporation (Aco) owns 100% of the shares of the capital stock of another corporation (Pco). Aco receives a dividend from Pco on January 1st, 2001. On January 1st 2002, all the shares of the capital stock of Pco are acquired by another corporation. Variable A of the formula for computing the GRIP Addition in respect of Pco for 2006 pursuant to ss 89(7) for 2001 was $ 1,000,000 and was nil for the years 2002 to 2005. Query: In determining the amount to be included in the GRIP addition for 2006 in respect of Aco, whether the dividend paid by Pco would be described in paragraph (c) of variable A in subsection 89(7).

(2) Two corporations (Aco and Bco) own respectively 50% of the shares of the capital stock of another corporation (Pco). Aco and Bco receive a dividend from Pco on January 1st, 2001. On January 1st, 2002, all the shares of the capital stock of Pco held by Aco are acquired by Bco. Bco receives a dividend from Pco on January 1st for each year from 2002 to 2005. Variable A of the formula for computing the GRIP Addition for 2006 in respect of Pco pursuant to ss 89(7) for 2001 was $ 1,000,000 and was nil for the years 2002 to 2005. Query: In determining the amount to be included in the GRIP addition for 2006 in respect of Aco and Bco, whether the dividends paid by Pco would be described in paragraph (c) of variable A in subsection 89(7).

(3) Three corporations (Aco, Bco and Cco) own respectively 40%, 20% and 20% of the shares of the capital stock of another corporation (Pco). Pco paid a total dividend of $ 1,000,000 to Aco, Bco and Cco on January 1st, 2001. On January 1st 2002, 50% of the shares of the capital stock of Pco held by Cco are acquired by Aco and the other 50% is acquired by Nco. Pco paid a total annual dividend of $ 1,000,000 to Aco, Bco and Nco on January 1st for each years from 2002 to 2004. Variable A of the formula for computing the GRIP Addition in respect of Pco for 2006 pursuant to ss 89(7) for 2001 was nil for the years 2001 to 2003 and was $ 1,000,000 for the years 2004 and 2005. Query: In determining the amount to be included in the GRIP addition for 2006 in respect of Aco, Bco, Cco and Nco, whether the dividends paid by Pco would be described in paragraph (c) of variable A in subsection 89(7).

Position: (1) No. (2) Aco: no; Bco: Possibly yes, depending on the circumstances. (3) Cco: No; Aco, Bco and Nco: reasonable proportion of variable A of ss 89(7) in respect of Pco.

Reasons: Wording of subsection 89(7).

XXXXXXXXXX 2013-047690
G. Gladu, M. Fisc.
(613) 946-3323

March 21, 2013

Dear Sir,

Subject: Request for interpretation -- subsection 89(7)

This is in response to your e-mail of February 1, 2013 in which you requested clarification as to the application of subsection 89(7) of the Income Tax Act (the "Act") in the context of the situations 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 letter could constitute an actual situation involving taxpayers. As stated in Information Circular 70-6R5, 2002, it is not the practice of the Directorate to issue a written opinion regarding proposed transactions otherwise than through advance rulings. However, we can 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 letter only very briefly describes a hypothetical particular situation, our comments below may not be fully applicable in a particular situation.

1) The Particular Situations

Situation 1

Corporation A held 100% of the shares of the capital stock of Corporation P.
The "fiscal period", as defined in subsection 249.1(1), of Corporation P terminated on December 31.
Corporation A received a dividend of $1,000,000 from Corporation P on January 1, 2001. This dividend was deductible under subsection 112(1) in computing the taxable income of Corporation A. Corporation P was related to Corporation A at the moment of payment of the dividend.
On January 1, 2002, all shares of the capital stock of Corporation P were sold to Corporation C.
For the taxation year beginning on January 1, 2001 and ending on December 31, 2001, the "full rate taxable income" ("FRTI") within the meaning of subsection 123.4(1) of Corporation P was $1,587,302.
Corporation P's FRTI was $0 in the 2002, 2003, 2004 and 2005 taxation years.
For the 2002, 2003, 2004 and 2005 taxation years, Corporation P paid an annual dividend of $1,000,000 to Corporation C. These dividends were deductible under subsection 112(1) in computing the taxable income of Corporation C. Corporation P was connected to Corporation C at the time of payment of the dividends.
Corporation A, Corporation C and Corporation P were "Canadian-controlled private corporations" ("CCPCs") within the meaning of subsection 125(7) for taxation years ending after 2000 and before 2006 (the "Period").

Situation 2

Corporation A and Corporation B each held 50% of the shares of the capital stock of Corporation P.
The "fiscal period", as defined in subsection 249.1(1), of Corporation P terminated on December 31.
Corporation A and Corporation B each received a dividend of $500,000 from Corporation P on January 1, 2001. These dividends were deductible under subsection 112(1) in computing the taxable income of Corporation A and Corporation B. Corporation P was connected to Corporation A and Corporation B at the time of payment of the dividends.
On January 1, 2002, Corporation A disposed of all the shares of the capital stock of Corporation P that it held to Corporation B.
For the taxation year beginning January 1, 2001 and ending December 31, 2001, Corporation P's FRTI was $1,587,302.
For the 2002, 2003, 2004 and 2005 taxation years, Corporation P paid an annual dividend of $1,000,000 to Corporation B. These dividends were deductible under subsection 112(1) in computing the taxable income of Corporation B. Corporation P was connected to Corporation B at the time of payment of the dividends.
Corporation P sustained non-capital losses of $250,000 for each of the 2002, 2003, 2004 and 2005 taxation years.
Corporation A, Corporation B and Corporation P were CCPCs during the Period.

Situation 3

Corporation A, Corporation B and Corporation C held 40%, 20% and 40%, respectively, of the shares of the capital stock of Corporation P.
The "fiscal period", as defined in subsection 249.1(1), of Corporation P terminated on December 31.
Corporation P paid a total dividend of $1,000,000 to its shareholders on January 1, 2001.
On January 1, 2002, Corporation C disposed of one-half of the shares of the capital stock of Corporation P it held to Corporation A and the other half to Corporation N.
Corporation A, Corporation B and Corporation N then held 60%, 20% and 20%, respectively, of the shares of the capital stock of Corporation P.
Corporation P's FRTI was $0 for the 2001, 2002 and 2003 taxation years and $1,587,302 for each of the 2004 and 2005 taxation years.
For the 2002, 2003 and 2004 taxation years, Corporation P paid a total annual dividend of $1,000,000 to its shareholders.
The dividends paid by Corporation P were deductible under subsection 112(1) in computing the taxable income of Corporation A, Corporation B, Corporation C and Corporation N. Corporation P was related to Corporation A, Corporation B, Corporation C and Corporation N at the time of payment of the dividends.
Corporation A, Corporation B, Corporation C, Corporation N and Corporation P were CCPCs during the Period.

For purposes of our comments, we have assumed that Corporation P did not receive any deductible dividends pursuant to subsection 112(1) during the Period.

2) Your Questions

Situation 1

You requested our opinion as to whether it would be reasonable to consider, given the circumstances, that the $1,000,000 dividend received by Corporation A on January 1, 2001, is fully included in paragraph (c) of element A of subsection 89(7) for Corporation A.

Situation 2

You requested our opinion as to whether it would be reasonable to consider, given the circumstances, that the $500,000 dividend received by Corporation A on January 1, 2001, is fully included in paragraph (c) of element A of subsection 89(7) for Corporation A.

You also wish to know whether it would be reasonable to consider, under the circumstances, for the dividend of $500,000 received by Corporation B on January 1, 2001, to be excluded from subparagraph (c) of element A of subsection 89(7) for Corporation B.

Situation 3

You requested our opinion as to whether it would be reasonable under the circumstances for the dividend of $400,000 received by Corporation C on January 1, 2001 not to be included in paragraph (c) of element A of paragraph 89(7) for Corporation C.

You also wish to know if the amount of item A in subsection 89(7) in respect of Corporation P should be allocated between Corporation A, Corporation B and Corporation N.

3) Our Comments

In general, subsection 89(7) provides that a CCPC may add in its calculation of the addition to its general rate income pool an amount respecting the FRTI in respect of the taxation years that ended during the Period. Subparagraphs (a) and (b) of element A of this paragraph are relevant in this regard.

For its part, paragraph (c) refers to the addition of a dividend received by the CCPC during the same period. However, this addition is subject to a condition that it must be reasonable to consider that such dividend is attributable to an amount described in paragraph (a), (b) or (c) in respect of the dividend payer corporation.

More specifically, paragraph (c) reads as follows:

c) all amounts each of which was deductible under subsection 112(1) in computing the corporation’s taxable income for a taxation year of the corporation (in this paragraph referred to as the “particular corporation”) that ended after 2000 and before 2006, and is in respect of a dividend received from a corporation (in this paragraph 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, to the extent that it is reasonable to consider, having regard to all the circumstances (including but not limited to other shareholders having received dividends from the payer corporation), that the dividend was attributable to an amount that is, or if this subsection applied to the payer corporation would be, described in this paragraph or in paragraph (a) or (b) in respect of the payer corporation

Situation 1

We are of the view that the $1,000,000 dividend received by Corporation A on January 1, 2001 would not be included in paragraph (c) of element A of Section 89(7) for Corporation A. In fact, we are of the view that it would not be reasonable to consider, in the circumstances, that this dividend would be attributable to element A of subsection 89(7) in respect of Corporation P for its taxation year ended on December 31, 2001.

In addition, we are of the view that it may be reasonable to consider, in the circumstances, that a portion of the dividends received by Corporation C during the Period is attributable to element A of subsection 89(7) in relation to Corporation P.

In particular, on the basis of the facts provided, we are of the view that it would not be reasonable to consider that the $1,000,000 dividend received by Corporation A on January 1, 2001 was attributable to FRTI of Corporation P in the amount of $1,587,302 which was realized following the payment of this dividend, i.e. during its taxation year from January 1 to December 31, 2001. In such a context, this dividend was likely attributable to taxable income of Corporation P generated before the Period.

The FRTI of Corporation P for its 2001 taxation year of $1,587,302, which was not distributed at the time of the acquisition by Corporation B of the shares of the capital stock of Corporation P held by Corporation A on January 1, 2002, was instead distributed to Corporation B through the payment of dividends from Corporation P to Corporation B during the Period.

Situation 2

We are of the view that the $500,000 dividend received by Corporation A on January 1, 2001 is not described by paragraph (c) of element A of subsection 89(7) for Corporation A. In particular, we are of the view that that it would not be reasonable to consider, given the circumstances, that this dividend is attributable to element A of subsection 89(7) in respect of Corporation P for its taxation year ending on December 31, 2001.

On the other hand, we are of the view that it could be reasonable to consider, in the circumstances, that a part of the dividends received by Corporation B in the Period was attributable to element A of subsection 89(7) respecting Corporation P.

Situation 3

We are of the view that the $400,000 dividend received by Corporation C on January 1, 2001 is not included in paragraph (c) of Subsection 89(7) for Corporation C. In particular, we are of the view that it would not be reasonable to consider, given the circumstances, that this dividend is attributable to element A of subsection 89(7) in respect of Corporation P for its taxation year ending on December 2001.

In our opinion, the amount of element A of subsection 89(7) respecting Corporation P must be apportioned reasonably, in accordance with the facts and circumstances, between Corporation A, Corporation B and Corporation N in order to determine the amount which should be included in paragraph (c) of element A of subsection 89(7) for each of Corporation A, Corporation B and Corporation C.

We hope that our comments will be of assistance.

Best regards,

Stéphane Prud'Homme, Notary, M. Fisc.
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch

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Text of Severed Letter

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.

Position: (1) No. (2) Aco: no; Bco: Possibly yes, depending on the circumstances. (3) Cco: No; Aco, Bco and Nco: reasonable proportion of variable A of ss 89(7) in respect of Pco.

Reasons: Wording of subsection 89(7).

XXXXXXXXXX 2013-047690
G. Gladu, M. Fisc.
(613) 946-3323

Le 21 mars 2013

Monsieur,

Objet: Demande d'interprétation paragraphe 89(7)

La présente est en réponse à votre courriel du 1er février 2013 dans lequel vous nous demandez des précisions quant à l'application du paragraphe 89(7) de la Loi de l'impôt sur le revenu (ci-après la «Loi») dans le cadre des situations décrites ci-après.

À moins d'indication contraire, tous les renvois législatifs dans la présente sont des renvois aux dispositions de la Loi.

Il nous apparaît que les situations décrites dans votre courriel et ci-après résumées pourraient constituer des situations réelles impliquant des contribuables. Comme l'explique le paragraphe 22 de la Circulaire d'information 70-6R5 du 17 mai 2002, la présente Direction n'a pas comme pratique de fournir des observations sur les opérations envisagées concernant des contribuables précis autrement que sous la forme d'une décision anticipée en matière d'impôt sur le revenu. Toutefois, nous sommes en mesure de vous offrir les commentaires généraux suivants qui pourraient vous être utiles. Il est à noter que l'application d'une ou de plusieurs dispositions de la Loi nécessite généralement l'analyse de tous les faits se rapportant à une situation particulière donnée. En conséquence et compte tenu du fait que votre courriel ne décrit que sommairement les situations hypothétiques données, les commentaires que nous formulons ci-après pourraient ne pas s'appliquer intégralement dans une situation précise.

1) Les situations données

Situation 1

Société A détiendrait 100 % des actions du capital-actions de Société P.
L'«exercice», au sens du paragraphe 249.1(1), de Société P se terminerait le 31 décembre.
Société A aurait reçu un dividende de 1 000 000 $ de Société P le 1er janvier 2001. Ce dividende serait déductible en application du paragraphe 112(1) dans le calcul du revenu imposable de Société A. Société P serait rattachée à Société A au moment du versement du dividende.
Le 1er janvier 2002, toutes les actions du capital-actions de Société P seraient vendues à Société C.
Pour l'année d'imposition commençant le 1er janvier 2001 et se terminant le 31 décembre 2001, le «revenu imposable au taux complet» (« RITC ») au sens du paragraphe 123.4(1) de Société P serait de 1 587 302 $.
Le RITC de Société P serait de 0 $ au cours des années d'imposition 2002, 2003, 2004 et 2005.
Pour les années d'imposition 2002, 2003, 2004 et 2005, Société P aurait versé un dividende annuel de 1 000 000 $ à Société C. Ces dividendes seraient déductibles en application du paragraphe 112(1) dans le calcul du revenu imposable de Société C. Société P serait rattachée à Société C au moment du versement des dividendes.
Société A, Société C et Société P seraient des «sociétés privées sous contrôle canadien» («SPCCs») au sens prévu au paragraphe 125(7) pendant les années d'imposition terminées après 2000 et avant 2006 (ci-après la «Période»).

Situation 2

Société A et Société B détiendraient chacune 50 % des actions du capital-actions de Société P.
L'«exercice», au sens du paragraphe 249.1(1), de Société P se terminerait le 31 décembre.
Société A et Société B auraient chacune reçu un dividende de 500 000 $ de Société P le 1er janvier 2001. Ces dividendes seraient déductibles en application du paragraphe 112(1) dans le calcul du revenu imposable de Société A et de Société B. Société P serait rattachée à Société A et Société B au moment du versement des dividendes.
Le 1er janvier 2002, Société A disposerait de toutes les actions du capital-actions de Société P qu'elle détient en faveur de Société B.
Pour l'année d'imposition commençant le 1er janvier 2001 et se terminant le 31 décembre 2001, le RITC de Société P serait de 1 587 302 $.
Pour les années d'imposition 2002, 2003, 2004 et 2005, Société P aurait versé un dividende annuel de 1 000 000 $ à Société B. Ces dividendes seraient déductibles en application du paragraphe 112(1) dans le calcul du revenu imposable de Société B. Société P serait rattachée à Société B au moment du versement des dividendes.
Société P aurait subi des pertes autres qu'en capital de 250 000 $ pour chacune des années d'imposition 2002, 2003, 2004 et 2005.
Société A, Société B et Société P seraient des SPCCs pendant la Période.

Situation 3

Société A, Société B et Société C détiendraient respectivement 40 %, 20 % et 40 % des actions du capital-actions de Société P.
L'«exercice», au sens du paragraphe 249.1(1), de Société P se terminerait le 31 décembre.
Société P aurait versé un dividende total de 1 000 000 $ à ses actionnaires le 1er janvier 2001.
Le 1er janvier 2002, Société C disposerait de la moitié des actions du capital-actions de Société P qu'elle détient en faveur de Société A et de l'autre moitié en faveur de Société N.
Société A, Société B et Société N détiendraient alors respectivement 60 %, 20 % et 20 % des actions du capital-actions de Société P.
Le RITC de Société P serait de 0 $ pour les années d'imposition 2001, 2002 et 2003 et de 1 587 302 $ pour chacune des années d'imposition 2004 et 2005.
Pour les années d'imposition 2002, 2003 et 2004, Société P aurait versé un dividende annuel total de 1 000 000 $ à ses actionnaires.
Les dividendes versés par Société P seraient déductibles en application du paragraphe 112(1) dans le calcul du revenu imposable de Société A, Société B, Société C et Société N. Société P serait rattachée à Société A, Société B, Société C et Société N au moment du versement des dividendes.
Société A, Société B, Société C, Société N et Société P seraient des SPCCs pendant la Période.

Pour les fins de nos commentaires, nous prenons comme hypothèse que Société P n'aurait reçu aucun dividende déductible en application du paragraphe 112(1) au cours de la Période.

2) Vos questions

Situation 1

Vous nous demandez notre opinion à savoir s'il serait raisonnable de considérer, compte tenu des circonstances, que le dividende de 1 000 000 $ reçu par Société A le 1er janvier 2001 soit entièrement inclus à l'alinéa c) de l'élément A du paragraphe 89(7) de Société A.

Situation 2

Vous nous demandez notre opinion à savoir s'il serait raisonnable de considérer, compte tenu des circonstances, que le dividende de 500 000 $ reçu par Société A le 1er janvier 2001 soit entièrement inclus à l'alinéa c) de l'élément A du paragraphe 89(7) de Société A.

Vous désirez également connaître notre opinion à savoir s'il serait raisonnable, compte tenu des circonstances, que le dividende de 500 000 $ reçu par Société B le 1er janvier 2001 ne soit pas inclus à l'alinéa c) de l'élément A du paragraphe 89(7) de Société B.

Situation 3

Vous nous demandez notre opinion à savoir s'il serait raisonnable, compte tenu des circonstances, que le dividende de 400 000 $ reçu par Société C le 1er janvier 2001 ne soit pas inclus à l'alinéa c) de l'élément A du paragraphe 89(7) de Société C.

Vous voulez également savoir si le montant de l'élément A du paragraphe 89(7) relativement à Société P devrait être réparti entre Société A, Société B et Société N.

3) Nos commentaires

De façon générale, le paragraphe 89(7) prévoit qu'une SPCC peut ajouter dans le calcul de sa majoration du compte de revenu à taux général, un montant relatif au RITC relativement aux années d'imposition terminées au cours de la Période. Les alinéas a) et b) de l'élément A de ce paragraphe sont pertinents à cet égard.

Pour sa part, l'alinéa c) vise l'ajout d'un dividende reçu par la SPCC au cours de cette même période. Par contre, cet ajout est assorti d'une condition voulant qu'il doit être raisonnable de considérer que ce dividende est attribuable à une somme qui est visée aux alinéas a), b) ou c) relativement à la société ayant versé le dividende.

Plus spécifiquement, l'alinéa c) se lit comme suit :

c) le total des sommes dont chacune était déductible en application du paragraphe 112(1) dans le calcul de son revenu imposable pour une de ses années d'imposition s'étant terminée après 2000 et avant 2006 et se rapporte à un dividende qu'elle a reçu d'une société (appelée «société payeuse» au présent alinéa) qui lui était rattachée (au sens du paragraphe 186(4)) au moment du versement du dividende, dans la mesure où il est raisonnable de considérer, compte tenu des circonstances (notamment la réception par d'autres actionnaires de dividendes de la société payeuse), que le dividende était attribuable à une somme qui est visée au présent alinéa ou aux alinéas a) ou b) relativement à la société payeuse, ou le serait si le présent paragraphe s'appliquait à cette société.

Situation 1

Nous sommes d'avis que le dividende de 1 000 000 $ reçu le 1er janvier 2001 par Société A ne serait pas visé à l'alinéa c) de l'élément A du paragraphe 89(7) de Société A. En effet, nous sommes d'avis qu'il ne serait pas raisonnable de considérer, compte tenu des circonstances, que ce dividende serait attribuable à l'élément A du paragraphe 89(7) relativement à Société P pour son année d'imposition s'étant terminée le 31 décembre 2001.

Par ailleurs, nous sommes d'avis qu'il pourrait être raisonnable de considérer, compte tenu des circonstances, qu'une partie des dividendes reçus par Société C au cours de la Période soit attribuable à l'élément A du paragraphe 89(7) relativement à Société P.

Plus particulièrement, sur la base des faits fournis, nous sommes d'avis qu'il ne serait pas raisonnable de considérer que le dividende de 1 000 000 $ reçu par Société A le 1er janvier 2001 serait attribuable au RITC de Société P d'un montant de 1 587 302 $ qui serait réalisé après le versement de ce dividende, soit au cours de son année d'imposition du 1er janvier au 31 décembre 2001. Dans un tel contexte, ce dividende serait fort probablement attribuable à du revenu imposable de Société P généré avant la Période.

Le RITC de Société P pour l'année d'imposition 2001 d'un montant de 1 587 302 $, qui serait non distribué au moment de l'acquisition par Société B des actions du capital-actions de Société P détenues par Société A le 1er janvier 2002, serait plutôt distribué à Société B au moyen du versement des dividendes de Société P à Société B au cours de la Période.

Situation 2

Nous sommes d'avis que le dividende de 500 000 $ reçu le 1er janvier 2001 par Société A ne serait pas visé à l'alinéa c) de l'élément A du paragraphe 89(7) de Société A. En effet, nous sommes d'avis qu'il ne serait pas raisonnable de considérer, compte tenu des circonstances, que ce dividende serait attribuable à l'élément A du paragraphe 89(7) relativement à Société P pour son année d'imposition s'étant terminée le 31 décembre 2001.

Par contre, nous sommes d'avis qu'il pourrait être raisonnable de considérer, compte tenu des circonstances, qu'une partie des dividendes reçus par Société B au cours de la Période soit attribuable à l'élément A du paragraphe 89(7) relativement à Société P.

Situation 3

Nous sommes d'avis que le dividende de 400 000 $ reçu par Société C le 1er janvier 2001 ne serait pas visé à l'alinéa c) de l'élément A du paragraphe 89(7) de Société C. En effet, nous sommes d'avis qu'il ne serait pas raisonnable de considérer, compte tenu des circonstances, que ce dividende serait attribuable à l'élément A du paragraphe 89(7) relativement à Société P pour son année d'imposition s'étant terminée le 31 décembre 2001.

Selon nous, le montant de l'élément A du paragraphe 89(7) relativement à Société P devrait être réparti de façon raisonnable, selon les faits et circonstances, entre Société A, Société B et Société N afin de déterminer le montant qui serait inclus à l'alinéa c) de l'élément A du paragraphe 89(7) de chacune de Société A, Société B et Société C.

Nous espérons que nos commentaires vous seront utiles et nous vous prions d'agréer, Monsieur, l'expression de nos salutations distinguées.

Stéphane Prud'Homme, notaire, M. Fisc.
Division des réorganisations
Direction des décisions en impôt
Direction générale de la politique législative et des affaires réglementaires

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 89 - Subsection 89(7)

determination of reasonable attribution of dividend to FRTI of payer corp

Situation 1

Corporation A received a taxable dividend of $1M from its wholly-owned subsidiary (Corporation P) on January 1, 2001, then sold all its shares to Corporation C on January 1, 2002. All three corporations were Canadian-controlled private corporations for the 2001 to 2006 years (the Period). For its 2001 (calendar) taxation year, the full rate taxable income (FRTI) of Corporation P was $1,587,302, and its FRTI was nil for 2002 through 2005. For each of 2002 through 2005, Corporation P paid a $1M taxable dividend to Corporation C.

In response to a query as to whether it was reasonable to consider that the $1M dividend received by Corporation A in 2001 was fully included in para. (c) of element A of s. 89(7), CRA indicated "no" and stated (TaxInterpretations translation):

[I]t would not be reasonable to consider, in the circumstances, that this dividend would be attributable to element A of subsection 89(7) in respect of Corporation P for its taxation year ended on December 31, 2001.

In addition, we are of the view that it may be reasonable to consider, in the circumstances, that a portion of the dividends received by Corporation C during the Period is attributable to element A of subsection 89(7) in relation to Corporation P.

Situation 2

Corporations A and B each held 50% of the shares of Corporation P, and each received a $500,000 dividend from it on January 1, 2001. On January 1, 2002, Corporation A disposed of all of its shares to Corporation B. For its 2001 taxation year, the FRTI of Corporation P was $1,587,302. For its 2002 to 2005 taxation years, Corporation P paid annual dividends of $1M to Corporation B, and it sustained non-capital losses of $250,000 in each of those years.

In response to a query as to whether it was reasonable to consider that the $500,000 dividend received by each of Corporation A and B in 2001 was respectively included under para. (c) of element A of s. 89(7), CRA indicated "no" (for Corporation A) and potentially "yes" (for Corporation B), stating (TaxInterpretations translation):

[Re] the $500,000 dividend received by Corporation A on January 1, 2001 ... it would not be reasonable to consider ..., that this dividend is attributable to element A of subsection 89(7) in respect of Corporation P for its taxation year ending on December 31, 2001.

On the other hand, we are of the view that it could be reasonable to consider, in the circumstances, that a part of the dividends received by Corporation B in the Period was attributable to element A of subsection 89(7) respecting Corporation P.

Situation 3

On January 1, 2001, Corporation P paid a $1M dividend to its shareholders: Corporations A, B and C holding 40%, 20% and 20% of its shares. On January 1, 2002, Corporation C sold half of its shares to Corporation A, and sold the other half to Corporation N, so that Corporations A, B and N held 60%, 20% and 20% of the shares. The FRTI of Corporation P was nil for the 2001, 2002 and 2003 taxation years, and $1,587,302 for each of 2004 and 2005. In 2002, 2003 and 2004, Corporation P paid a dividend of $1M. CRA stated (TaxInterpretations translation):

[Re] the $400,000 dividend received by Corporation C on January 1, 2001 ... it would not be reasonable to consider ... that this dividend is attributable to element A of subsection 89(7) in respect of Corporation P for its taxation year ending on December 2001.

... [T]he amount of element A of subsection 89(7) respecting Corporation P must be apportioned reasonably, in accordance with the facts and circumstances, between Corporation A, Corporation B and Corporation N in order to determine the amount which should be included in paragraph (c) of element A of subsection 89(7) for each of Corporation A, Corporation B and Corporation C.

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21 March 2013 External T.I. 2013-0476901E5 F - GRIP addition under 89(7)

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Situation 1

Situation 2

Situation 3