31 March 2011 External T.I. 2009-0340841E5 - GRIP addition for 2006

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: Computation of a corporation's GRIP addition for 2006 under paragraph (c) of element A in subsection 89(7) where the "full-rate taxable income" earned by the payer corporation after 2000 and before 2006 is less than the aggregate dividends it paid or is deemed to have paid to connected corporations during the same period of time

Position: A pro-rata approach should be used to the determine the portion of the dividend attributable to the payer's "full rate taxable income" that must be allocated to each dividend recipient under paragraph (c) of element A in subsection 89(7)

Reasons: The wording of the Act as interpreted in previous CRA's administrative positions

XXXXXXXXXX
									2009-034084
									François Mathieu

March 31, 2011

Dear Sir:

Re: Request for a technical interpretation
GRIP addition for 2006

We are writing in response to your letter dated September 15, 2009 in which you requested our views regarding the computation of a corporation's GRIP addition for 2006 under paragraph (c) of element A in subsection 89(7) where the "full rate taxable income" earned by the payer corporation after 2000 and before 2006 is less than the aggregate dividends it paid or it is deemed to have paid to connected corporations during the same period of time.

As stated in paragraph 22 of Information Circular 70-6R5, the Income Tax Rulings Directorate only provides written confirmation of the tax consequences arising from a specific proposed transaction by way of an advance income tax ruling. You should also note that the request for a technical interpretation must be handled by CRA's tax services office responsible for a specific taxpayer if the transaction herein described is completed. We are nevertheless prepared to provide you with the following comments, which are not binding on the CRA. Unless otherwise indicated, all statutory references are to the Income Tax Act.

The hypothetical transaction:

1. Opco is a Canadian-controlled private corporation whose aggregate full rate taxable income was equal to $200,000 for the period that ended after 2000 and before 2006.

2. Prior to 2004, Opco had two (2) corporate shareholders: Holdco A and Holdco B.

3. In 2001, Opco paid a dividend of $50,000 to Holdco A, which was deductible under subsection 112(1) in computing Holdco's taxable income for its 2001 taxation year.

It is reasonable to consider that a portion of the taxable dividend received by Holdco A was attributable to Opco's aggregate full rate taxable income.

4. Opco was connected (within the meaning assigned by subsection 186(4)) to Holdco A and Holdco B at the time it paid or is deemed to have paid a dividend to those corporations.

5. In 2001, Opco redeemed all the preferred shares held by Holdco B. Given that the amount paid by Opco was in excess of the paid-up capital ("PUC") in respect of those shares, Opco is deemed to have paid and Holdco B is deemed to have received a dividend of $30,000, which was deductible under subsection 112(1) in computing Holdco B's taxable income for the taxation year in which Opco's preferred shares were redeemed. It is reasonable to consider that a portion of the taxable dividend deemed to be received by Holdco B was attributable to Opco's aggregate full rate taxable income.

6. Further to Opco's redemption of the preferred shares held by Holdco B, Opco issued shares to Holdco C. Holdco A and Holdco C owned an equal number of shares in Opco immediately after that time.

7. In 2004, Opco redeemed all the shares held by Holdco C. Given that the amount paid by Opco was in excess of the paid-up capital ("PUC") in respect of those shares, Opco is deemed to have paid and Holdco C is deemed to have received a dividend of $920,000, which was deductible under subsection 112(1) in computing Holdco C's taxable income for the taxation year in which Opco's preferred shares were redeemed. It is reasonable to consider that a portion of the taxable dividend deemed to be received by Holdco C was attributable to Opco's aggregate full rate taxable income.

8. Opco was connected (within the meaning assigned by subsection 186(4)) to Holdco C at the time it is deemed to have paid a dividend to that corporation.

Interpretation request:

How should Opco`s aggregate full rate taxable income be allocated to Holdco A, Holdco B and Holdco C for the purpose of determining their GRIP addition for 2006 pursuant to paragraph (c) of element A in subsection 89(7)?

Your views:

It is your view that all of Opco's aggregate full rate taxable income should be allocated to Holdco A because Holdco B and Holdco C are only deemed to have received dividends from Opco as a result of the redemption of the shares they held in that corporation.

Our comments:

Where the aggregate amount of dividends paid or deemed to be paid by a corporation to multiple shareholders after 2000 and before 2006 exceeds the "full rate taxable income" it earned during the same period of time, the CRA has ruled that a pro rata approach should be used to determine the portion of the dividend attributable to the payer's "full rate taxable income" that must be allocated to each dividend recipient under paragraph (c) of element A in subsection 89(7) (footnote 1) .

You should note that the term "dividend" is defined in subsection 248(1) as including a stock dividend whereas the term "taxable dividend" is defined in subsection 89(1) as a dividend other that a dividend in respect of which the corporation paying the dividend has elected in accordance with subsection 83(1) or 83(2). Moreover, subsection 82(1) provides that the total of all amounts received by a taxpayer from corporations resident in Canada on account of taxable dividends shall be included in computing the income of a taxpayer. Finally, subsection 84(3) provides that a dividend is deemed to be paid, and received where a corporation has redeemed, acquired or cancelled any of the shares of its capital stock, and the amount paid on the redemption, acquisition or cancellation exceeds the PUC in respect of those shares immediately before that time.

In our view, the reference to: (i) "an amount deductible under subsection 112(1) in computing the corporation's taxable income" in paragraph (c) of element A, and to (ii) "the total of all amounts each of which is a dividend paid" in element B of subsection 89(7) includes dividends that are deemed to be paid under subsection 84(3).

Given the pro rata approach applicable to the facts described in the hypothetical transaction, it appears reasonable to conclude that the portion of the dividend paid or deemed to have been paid by Opco that is attributable to the "full rate taxable income" that it earned after 2000 and before 2006 as contemplated in paragraph (c) of element A in subsection 89(7) would be allocated as follows: Holdco A - $10,000; Holdco B - $6,000 and Holdco C - $184,000.

We trust that our comments will be of assistance. However, we wish to remind you that the opinion expressed in this letter is not an advance income tax ruling and, consequently, is not binding on the CRA in accordance to paragraph 22 of Information Circular 70-6R5.

Yours truly,

Yves Moreno
Manager
Reorganizations and Resources Division
Corporate Reorganizations Section I
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 See 2007-026300, 2008-028494 (APFF 2008 Tax Conference - Round Table - Question 5) and 2008-029411