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: Does the CRA have any new compliance issues that it would like to discuss?
Position: Yes, dividend strips structured as arrangements that invoke subsection 75(2)
QUESTION #19 - COMPLIANCE ISSUES
Does the CRA have any new compliance issues that it would like to discuss with the STEP audience?
CRA Response:
Dividend strips are an arrangement involving the use of a trust to funnel dividend income to beneficiaries.
The arrangements are structured to invoke subsection 75(2) in a manner which purports to insure that neither the trust nor the beneficiaries are taxable on the income.
A typical arrangement may involve a family operating company making a contribution to a family trust, which uses those contributed funds to acquire shares in a new corporation. The series of transactions is designed to culminate in the new corporation paying a large dividend to the trust, using funds stripped from the operating company, with the intent that the dividend be attributed back to the operating company.
The CRA is challenging these arrangements on the basis that the income is required pursuant to paragraph 12(1)(j) and in some cases, subsection 104(13), to be added to the income of the Trust and/or the beneficiaries, depending on the circumstances.
It appears that paragraph 10 of Interpretation Bulletin IT-369R - Attribution of trust income to settlor, is being relied upon to prevent taxation of the dividend in the trust, or in the hands of the beneficiaries. It should be noted, however, that paragraph 10 of the IT is a general administrative concession; it is not law. CRA is of the view that this concession does not apply to such schemes.
It is our alternative position that the GAAR applies to deny tax benefits arising from these arrangements.
Phil Kohnen
2011-040195
June 2-3, 2011
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