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20 February 2014 External T.I. 2013-0480051E5 F - Eligible dividend and safe income
Principal Issues: 1. Opco designates a portion of a dividend it pays to Gesco to be an eligible dividend. Because of the application of subsection 55(2), Gesco is considered to have received a dividend of a lesser amount than the portion designated by Opco. Whether the GRIP of Opco will be reduced by the portion designated. Whether the GRIP of Gesco will be increased by an amount different from the amount of the reduction of the GRIP of Opco.
2. If Opco designates a portion of a dividend it pays to Gesco equal to the amount of the dividend considered to have been received by Gesco after the application of subsection 55(2) (but not higher than the GRIP of Opco), whether the GRIP of Gesco will be increased by the amount of the dividend considered to have been received by Gesco after the application of subsection 55(2).
Position: 1. The GRIP of Opco will be reduced by the portion of the dividend it pays to Gesco that was designated to be an eligible dividend. However, the GRIP of Gesco will be increased by the amount of the dividend considered received by Gesco after the application of subsection 55(2), which amount is less than the portion designated by Opco.
2. The GRIP of Gesco will be increased by the amount of the dividend considered received by Gesco after the application of subsection 55(2), which amount is equal to the portion of the dividend designated by Opco.
Reasons: 1. Wording of the Act and previous position.
2. Textual, contextual and purposive interpretation of the GRIP, of subsection 89(14) and of subsection 55(2).
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2013-048005
Sylvie Labarre, CPA, CA
February 20, 2014
Dear Sir,
Subject: Portion of eligible dividend and safe income
This is in response to your e-mail of February 28, 2013, in which you requested our views as to the relationship between a dividend designated under subsection 89(14) of the Income Tax Act (the "Act") as an eligible dividend and a dividend equal to the safe income on hand of a corporation in the following hypothetical situation. We apologize for the delay required to respond to this request.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Facts
Opco and Holdco were Canadian-controlled private corporations.
Holdco held 30% of the Class A common shares and 30% of the Class B preferred shares of the capital stock of Opco. Holdco was not be related to other shareholders and no shareholder was related to Opco.
The Class A common shares of the capital stock of Opco were voting and participating. The Class B preferred shares of the capital stock of Opco were non-voting, they were entitled to a non-cumulative annual dividend of 4% and were redeemable at the option of the holder.
The fair market value of the Class A common shares of the capital stock of Opco held by Holdco was $200,000.
The fair market value of the Opco Class B preferred shares held by Holdco was $600,000 and was equal to 30% of the redemption value of all the shares of that class.
The other tax attributes of the B preferred shares of the capital stock of Opco held by Holdco were:
- Legal and tax paid-up capital: $200
- Adjusted cost base: $180,000
- Safe income on hand of those shares attributable to Holdco: $75,000
Opco's General Rate Income Account ("GRIP") at the end of the taxation year was $250,000.
Opco redeemed the Class B preferred shares of its capital stock held by Holdco for $600,000.
Holdco made separate taxable dividend elections under paragraph 55(5)(f) such that there were separate taxable dividends totaling the amount of the safe income on hand attributable to the Class B shares of the capital stock of Opco that it held, namely, $75,000.
Questions
You wish to know if Opco can designate an amount equal to 100% of its GRIP with respect to the deemed dividend calculated pursuant to subsection 84(3) in respect of the redemption of such preferred shares.
If such a designation of $250,000 is made and considering the facts of this hypothetical situation, including that the safe income on hand is less than the GRIP, you wish to know the amount by which Holdco’s GRIP would increase because of this redemption.
In addition, you wish to know whether Holdco's GRIP would increase by the same amount as the one indicated in response to the previous question if Opco made an eligible dividend designation of an amount equal to the safe income on hand, or $75,000.
Our Comments
This Technical Interpretation provides general comments on the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings and Technical Interpretations.
To answer your first question, Opco may designate a portion of the deemed dividend paid by Opco by virtue of subsection 84(3), equal to $250,000, as an eligible dividend in accordance with subsection 89(14). Opco's GRIP would be reduced by the amount of $250,000.
However, despite the designation as an eligible dividend of $250,000 by Opco, Holdco's GRIP would only be increased by $75,000 if subsection 55(2) applies and, because of this application the dividend considered to be received by Holdco is only $75,000, which is the amount of safe income on hand attributable to the Class B preferred shares in the capital of Opco held by Holdco.
Consequently, in such a situation, the reduction in the GRIP of the dividend payer, Opco, would not be equivalent to the increase in the GRIP of the dividend’s recipient, Holdco.
In order to avoid such a result, you were querying whether Opco could designate a portion of the deemed dividend paid by Opco, equal to $75,000 (the amount of safe income on hand attributable to the Class B preferred shares of capital stock of Opco held by Holdco), as an eligible dividend. In a situation where subsection 55(2) applies and where, because of this application, the dividend considered to be received by Holdco would amount to only $75,000, we would take the position that the dividend(s) considered as received by Holdco in the total amount of $75,000 (representing the safe income on hand) would be one or more eligible dividends, as the case may be. As a result, Holdco's GRIP would increase by $75,000. We would not prorate the eligible dividend between the separate dividends totalling $75,000, and the dividend which was deemed not to be a dividend by virtue of subsection 55(2).
Consequently, in this second situation, the decrease in the GRIP of the dividend payer, Opco, would correspond to the increase in the GRIP of the dividend recipient, Holdco.
We hope that our comments will be of assistance.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch
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