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: How does paragraph 260(11)(c) apply to a corporation that is a member of a partnership for purposes of claiming a dividend refund on dividend compensation payments paid by the partnership?
Position: Generally, pursuant to paragraph 260(11)(c) of the Act, a private corporation that is a member of a partnership is deemed, for the purposes of applying the dividend refund rules in section 129 of the Act, to have paid its specified proportion of the dividend compensation payments made by the partnership.
Reasons: See below.
XXXXXXXXXX
John Parker CMA
2013-049546
March 24, 2014
Dear XXXXXXXXXX:
Re: Securities Lending Arrangements
We are writing in reply to your query of June 19, 2013 wherein you asked our opinion as to how paragraph 260(11)(c) of the Income Tax Act (the "Act") applies to a professional corporation that is a member of a partnership for the purpose of claiming a dividend refund on dividend compensation payments paid by the partnership.
Our Comments
This technical interpretation provides general comments to assist you in determining the income tax treatment of your particular fact situation. The income tax treatment of specific transactions 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.
Subsection 260(1) of the Act defines securities lending arrangement ("SLA") as:
"
an arrangement under which
(a) a person (in this section referred to as the "lender") transfers or lends at any particular time a qualified security to another person (in this section referred to as the "borrower"),
(b) it can reasonably be expected, at the particular time, that the borrower will transfer or return after the particular time to the lender a security (in this section referred to as an "identical security") that is identical to the security so transferred or lent,
(c) the borrower is obligated to pay to the lender amounts equal to and as compensation for all amounts, if any, paid on the security that would have been received by the borrower if the borrower had held the security throughout the period that begins after the particular time and that ends at the time an identical security is transferred or returned to the lender,
(d) the lender's risk of loss or opportunity for gain or profit with respect to the security is not changed in any material respect, but does not include an arrangement one of the main purposes of which may reasonably be considered to be to avoid or defer the inclusion in income of any gain or profit with respect to the security, and
(e) if the lender and the borrower do not deal with each other at arm's length, it is intended that neither the arrangement nor any series of securities lending arrangements, loans or other transactions of which the arrangement is a part be in effect for more than 270 days."
Subsection 260(10) provides that, for purposes of section 260, a person includes a partnership. Paragraph 260(11)(c) of the Act states:
"A corporation that is, in a taxation year a member of a partnership is deemed
(c) for the purpose of applying section 129 in respect of the taxation year, to have paid
(i) if the partnership is not a registered securities dealer, the corporation's specified proportion, for each fiscal period of the partnership that ends in the taxation year, of each amount paid by the partnership (other than an amount for which a deduction in computing income may be claimed under subsection (6.1) by the corporation), and
"
In order to obtain a dividend refund under section 129 of the Act, a corporation must be a private corporation. A private corporation is defined in subsection 248(1) of the Act as having the meaning assigned by subsection 89(1) of the Act. The refund is limited to 1/3 of taxable dividends paid, or the corporation's refundable tax balance, if less.
Subsection 248(1) of the Act defines "specified proportion" of a member of a partnership, for a fiscal period, as
"the proportion of that member's share of the total income or loss or the partnership for the partnership's fiscal period is of the partnership's total income or loss for that period and, for the purpose of this definition, where that income or loss for a period is nil, that proportion shall be computed as if the partnership had income for that period in the amount of $1,000,000;"
In conclusion, pursuant to paragraph 260(11)(c) of the Act, a private corporation that is a member of a partnership is deemed, for the purposes of applying the dividend refund rules in section 129 of the Act, to have paid its specified proportion of the dividend compensation payments made by the partnership.
We trust our comments will be of assistance.
G. Moore
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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