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: 1. For dividends paid before March 29, 2012, whether the CRA would accept an eligible dividend designation made outside the time period set out in subsection 89(14) in circumstances where the result of an appeal causes a taxpayer's GRIP balance to increase. 2. (a) For dividends paid after March 29, 2012, whether the CRA would accept an eligible dividend designation made outside the time period set out in subsection 89(14.1) in circumstances where the result of an appeal causes a taxpayer's GRIP balance to increase; and (b) if answer to (a) is no, whether the CRA would accept a contingent eligible dividend designation which would have been made within the time period set out in subsection 89(14.1) to be held in abeyance and only effective if the appeal upheld the assessment resulting in an increase in the GRIP balance.
Position: 1. No. 2. (a) No. (b) No.
Reasons: See analysis below.
March 12, 2015
Re: Objection Eligible Dividend Designation
We are replying to your letter of August 1, 2014 in which you requested our comments with respect to the manner in which a taxpayer can make a late eligible dividend designation in the event that an assessment by the Canada Revenue Agency (the "CRA") which causes the taxpayer's general rate income pool ("GRIP") balance to increase is upheld at the end of the appeals process.
Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the "Act") as amended.
Facts and Assumptions
Our understanding of the facts and assumptions contemplated in your hypothetical situation is as follows:
A Canadian-controlled private corporation ("Canco") declared and paid out a dividend to its shareholders. The dividend was not designated as being an eligible dividend pursuant to subsection 89(14) because there was an insufficient GRIP balance in the year the dividend was paid out.
Subsequent to the payment of the dividend, Canco's taxation year in which the dividend was paid out was assessed and the claim of a full small business deduction was denied.
Canco appealed and the assessment was ultimately upheld after the day that was three years after the day on which the designation was required to be made pursuant to subsection 89(14). As a result, Canco's GRIP balance for that particular taxation year increased such that Canco had a sufficient GRIP balance in respect of the taxation year in which the dividend was paid out to its shareholders. As such, Canco wants to designate those dividends as eligible dividends pursuant to subsection 89(14).
Subsection 89(14) provides that a dividend is an eligible dividend where a corporation designates a dividend (or a portion thereof) that it pays as such. Pursuant to subsection 89(14), in order for the dividend to be designated as an eligible dividend, a corporation must notify each person or partnership to whom the dividend is paid in writing at that time that the dividend (or a portion thereof) is an eligible dividend.
Subsection 89(14.1) provides for a late designation of a taxable dividend to be an eligible dividend provided that, in the opinion of the Minister, the circumstances are such that it would be just and equitable to permit a designation under subsection 89(14) to be made before the date that is three years after the day on which the designation was required to be made. If the conditions in subsection 89(14.1) for a late designation are met, the designation is deemed to have been made at the time it was required to be made pursuant to subsection 89(14). That subsection applies to dividends paid on or after March 29, 2012.
You note that the CRA has previously commented on an administrative practice that provides relief in instances where a taxpayer is objecting to a Part III tax assessment and wishes to file a protective subsection 184(3) election. In document 2013-0504951E5, dated December 4, 2013, the CRA indicated that the Assessment and Benefit Services Branch is willing to accept and hold in abeyance a subsection 184(3) election filed in a timely manner in the context of an appeal involving a capital dividend account balance while the matter proceeds through the objection and appeal stages. The CRA further commented that it would disregard the election in the event the taxpayer is successful, thus making the election unnecessary. This represented a change in the CRA's position (document 2007-0221211I7, dated December 5, 2007, previously confirmed that the CRA could not defer the processing of a validly filed subsection 184(3) election until the ultimate resolution of an objection or determination by a court).
Your inquiry asks that we consider whether, at the time Canco's assessment is upheld and the full small business deduction is denied, the designation referred to in subsection 89(14) may be made and accepted by the CRA so that the dividends previously paid out by Canco on a date that is before March 29, 2012 are treated as eligible dividends.
Your inquiry also asks that we consider whether, under the same circumstances, a late designation may be made outside the time period set out in subsection 89(14.1) in respect of dividends paid by Canco on a date that is after March 29, 2012.
In respect of dividends paid out by Canco after March 29, 2012, you also ask us to consider whether the CRA would be prepared to extend its administrative practice with respect to subsection 184(3) elections to eligible dividend designations. Specifically, you are asking whether the CRA would be willing to accept and hold in abeyance an eligible dividend designation made in a timely manner when Canco is assessed by the CRA which would only become effective if a taxpayer has the required GRIP balance at the end of the appeals process.
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). 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 70-6R6, Advance Income Tax Rulings and Technical Interpretations.
Dividends Paid Before March 29, 2012
In respect of the dividends paid by Canco before March 29, 2012, our position remains unchanged from document 2007-0244111I7. Subsection 89(14) requires that, at the time a corporation pays the dividend that it wishes to designate as an eligible dividend, the corporation must give written notification to each person or partnership who receives any part of the dividend that the dividend or a portion thereof is an eligible dividend. Given the contemporaneous designation requirement found in subsection 89(14), a designation cannot be made when the CRA subsequently assesses Canco.
Moreover, the CRA cannot accept and hold in abeyance an eligible dividend designation made at the outset of an assessment which will only be effective if a taxpayer has the required GRIP balance at the end of the appeals process.
There are no other provisions in the Act that would allow for a late eligible dividend designation (section 600 of the Income Tax Regulations does not provide for late eligible dividend designations).
Dividends Paid After March 29, 2012
Subsection 89(14.1) could apply to dividends that are paid by Canco after March 29, 2012.
Subsection 89(14.1) was introduced to provide relief to the contemporaneous designation requirements found in subsection 89(14). This provision allows for late eligible dividend designations to be made only in very specific circumstances. First, the Minister must be of the opinion that it would be just and equitable to accept a late designation. The CRA has provided comments in this regard in previously published documents, including 2013-0495771C6, 2013-0475261E5, and 2012-0445661C6. Second, the late designation must be made before the day that is three years after the day on which the designation was required to be made pursuant to subsection 89(14).
A late designation in respect of a dividend that is paid out by Canco after March 29, 2012 cannot be made in any situation that falls outside the scope of subsection 89(14.1). Furthermore, the CRA cannot accept and hold in abeyance an eligible dividend designation made within the time period set out in subsection 89(14.1) when Canco is assessed by the CRA which will only be effective if a taxpayer has the required GRIP balance at the end of the appeals process.
We trust that our comments will be of assistance.
Corporate Reorganizations Section II
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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