CRA will not accept an eligible dividend election conditional on an unsuccessful appeal generating a GRIP balance

If a capital dividend paid by a corporation to its individual shareholder is disallowed by CRA (so that Part III tax is assessed), CRA is willing to hold the processing of a s. 184(3) election (to convert the dividend into a taxable dividend so as to eliminate the Part III tax) in abeyance, so that the election will be treated as void if the taxpayer’s objection is successful, and treated as timely filed if the objection (or subsequent appeal) is dismissed.

CRA is unwilling to extend this policy to the payment of a dividend thought to be made out of earnings eligible for the small business deduction (i.e., earnings thought not to generate a GRIP balance), so that no eligible dividend designation was made, where the corporation then is assessed to deny the deduction – so that CRA will not accept and hold in abeyance an eligible dividend designation made shortly after the assessment which is conditional on the corporation being unsuccessful in establishing that the earnings were eligible for the deduction.

Neal Armstrong. Summary of 12 March 2015 T.I. 2014-0541991E5 under s. 89(14.1).