2 August 2013 External T.I. 2013-0475261E5 - Eligible Dividend - Late Filing 89(14.1) & 184(3)

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: Whether, in the context of the particular hypothetical situation, subsection 89(14.1) of the Income Tax Act (the "Act") would apply at the time that an election is made for the purposes of subsection 184(3), such that the designation under subsection 89(14) would be deemed to be made at the time the designation is required to be made, with the result that the separate taxable dividend pursuant to subsection 184(3) is designated to be an eligible dividend?

Position: Clarifications provided.

Reasons: In accordance with the Act.

XXXXXXXXXX
2013-047526
S. Snell
(613) 946-3261

August 2, 2013

Dear XXXXXXXXXX:

RE: Potential Application of Subsections 89(14) and 89(14.1) in the Context of an Excess Capital Dividend Election under Subsection 184(3)

We are writing in response to your query requesting our comments in respect of the potential application of subsections 89(14) and 89(14.1) of the Income Tax Act (the "Act") in the circumstance where a corporation has made an election under subsection 184(3) to deem an excess capital dividend to be a separate taxable dividend, such that the designation under subsection 89(14) would be deemed to be made at the time the designation is required to be made, with the result that the separate taxable dividend pursuant to subsection 184(3) is designated to be an eligible dividend.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or a subparagraph is a reference to the relevant provision of the Act.

1) Facts and Assumptions

Our understanding of the facts and assumptions contemplated in your hypothetical situation is as follows:

1. After March 28, 2012, a Canadian-controlled private corporation ("Canco") has in the prescribed manner elected that a dividend declared and paid by it be deemed to be a capital dividend for the purposes of subsection 83(2).

2. Subsequent to the payment of the dividend, the Canada Revenue Agency ("CRA") determines that the amount of the dividend declared by the corporation to be a capital dividend is in excess of the corporation's capital dividend account balance as determined immediately before the payment of the dividend.

3. The corporation makes an election pursuant to subsection 184(3) to deem the portion of the dividend in excess of the corporation's capital dividend account balance to be a separate taxable dividend, payable at the time the original dividend was payable.

4. The corporation has a sufficient "general rate income pool" ("GRIP") balance at the time the dividend was paid, in order to designate the separate taxable dividend under subsection 184(3) to be an eligible dividend pursuant to subsection 89(14), such that no portion of the designated amount would meet the definition of "excessive eligible dividend designation" in subsection 89(1).

5. Any designation under subsection 89(14) requested in accordance with the late eligible dividend designation provision in subsection 89(14.1), would occur before the day that is three years after the day on which the designation was required to be made.

2) Your Question

Your question relates to the late eligible dividend designation provision in subsection 89(14.1), added by the 2012 Budget, effective for dividends paid on or after March 29, 2012.

Your views and analysis are based on the following provisions and CRA commentary:

Subsection 89(14) provides for an eligible dividend designation where a corporation designates a portion of a dividend it pays at any time to be an eligible dividend by notifying in writing at that time each person or partnership to whom the dividend is paid that the portion of the dividend is an eligible dividend.

Subsection 89(14.1) provides for a late designation of a taxable dividend to be an eligible dividend, if, 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, in which case the designation is deemed to have been made at the time the designation was required to be made.

In Technical Interpretation 2007-0244111I7, dated January 29, 2008, the CRA was asked, in the context of a similar hypothetical scenario to that outlined above, whether the designation in subsection 89(14) could apply at the time the an election is made for the purposes of subsection 184(3) to treat the separate taxable dividend as an eligible dividend. The CRA commented, prior to the enactment of subsection 89(14.1) and in accordance with law at that time, that as the designation provided for in subsection 89(14) must be made on or before the time of payment of the particular dividend, the designation cannot be made in the situation where, pursuant to subsection 184(3) and after the time the dividend is paid, an election is made to deem the dividend to have been a separate taxable dividend.

You note that the CRA commented on the application of proposed subsection 89(14.1) (which has since been enacted) in Technical Interpretation 2012-0445661C6, dated May 29, 2012. In that document, the CRA provided some general examples of situations that subsection 89(14.1) was designed to alleviate. You submit, however, that the particular situations outlined in this Technical Interpretation do not specifically include the hypothetical scenario contemplated above, where a late eligible dividend designation would be permitted at the time that an election is made for the purposes of subsection 184(3).

You have asked whether or not we would reconsider our conclusions in Technical Interpretation 2007-0244111I7 in the context of the hypothetical situation and in light of the provisions described above, and accept that the designation under subsection 89(14) would be deemed to be made at the time the designation is required to be made pursuant to subsection 89(14.1), with the result that the separate taxable dividend under subsection 184(3) would be designated to be an eligible dividend.

3) Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002.

The Income Tax Rulings Directorate is not in a position to enumerate detailed guidelines and the specific circumstances where it would be just and equitable to permit a late-filed designation under subsection 89(14), in accordance with subsection 89(14.1). Such determinations are a question of fact which must be decided on a case-by-case basis, after a review of all the facts and circumstances surrounding each specific situation.

In Technical Interpretation 2012-0445661C6, dated May 29, 2012, the Directorate commented on some general examples of situations where relief under subsection 89(14.1) may be available. In addition, taxpayers were advised to file any request for a late eligible dividend designation, along with the reasons why it would be just and equitable to permit the late designation, directly to their local Tax Services Office.

In the context of an excess capital dividend election under subsection 184(3), as described in the hypothetical scenario, we are prepared however to make the following additional comments regarding the potential application of the late eligible dividend designation pursuant to subsection 89(14.1).

The position of all affected shareholders must be considered in the course of determining circumstances for which acceptance of a late eligible dividend designation would be just and equitable.

The hypothetical situation contemplated assumes that Canco will have sufficient income taxed at the general corporate income tax rate at the time the dividend was paid to support an eligible dividend designation, such that no portion of the designated amount would meet the definition of "excessive eligible dividend designation" in subsection 89(1). As a result, the affected shareholders could arguably have received a dividend taxable at the applicable eligible dividend rate, instead of the dividend which was originally declared and paid as a non-taxable capital dividend.

Consequently, it is our view that the tax policy objectives underlying subsections 89(14) and 89(14.1), inter alia, of taxpayer certainty and improved tax fairness for corporations, would not be negatively affected by the application of subsection 89(14.1) to the designation under subsection 89(14) in the context of the hypothetical scenario, to the extent that the corporation had, when the dividend was paid, a GRIP balance to support an eligible dividend designation, provided the requirements of subsection 89(14.1) and the following conditions are met:

• The taxpayers took reasonable steps and care to comply with the requirements in respect of subsection 83(2) and the computation of the capital dividend account at the time that the capital dividend election was originally made;
• The late designation request under subsection 89(14.1) was not specifically intended by the taxpayers at the time that the subsection 83(2) election was made nor does the late designation request form part of a series of requests made on a regular basis; and,
• The late designation request does not involve aggressive tax planning.

Where subsection 89(14.1) applies, the designation under subsection 89(14) is deemed to have been made at the time the designation was required to be made. It is our view that, in the context of the hypothetical situation and provided the conditions described above are met, it would generally be just and equitable to permit the late designation under subsection 89(14.1). However, as indicated above, a request to file a late designation under subsection 89(14.1) must be submitted to the appropriate Tax Services Office or Taxation Centre, where the determination of whether or not it would be just and equitable to permit such a designation in light of the particular facts and circumstances would be decided on a case-by-case basis.

The above comments represent our general view with respect to the subject matter and are not binding on the CRA, as explained in paragraph 22 of Information Circular 70-6R5.

We trust that the foregoing will be of assistance to you.

Yours truly,

Stéphane Prud'Homme, LL.B., M. Fisc.
Manager
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch