9 November 2011 Ministerial Correspondence 2011-0414221M4 - Stock dividends allocated from EPSP

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. Whether the amount of the stock dividend to be included in income should be the fair market value of the shares or the increase in the paid-up capital of the non-resident corporation. 2. Whether a beneficiary of an EPSP must include in income for a year any amount allocated either contingently or absolutely.

Position: 1. The greater of two amounts. 2. Yes,

Reasons: 1. Based on the legislative proposals released on August 27, 2010. 2. Each amount allocated to an employee under an EPSP is included in the employee's income in the year.

November 9, 2011

XXXXXXXXXX

Dear XXXXXXXXXX :

Your member of Parliament, XXXXXXXXXX, forwarded to me a copy of your correspondence concerning dividends and tax. I apologize for the delay in replying.

Based on the information you provided, it appears that an employees' profit-sharing plan (EPSP) holds shares of a U.S. resident corporation for you. In 2010, the EPSP received a special dividend in the form of shares from the U.S. resident corporation, which was in the process of electing to be treated as a real estate investment trust under the U.S. Internal Revenue Code. The trustee of the EPSP allocated the amount of that special stock dividend to you.

An EPSP arrangement allows an employer to share profits with all employees or with a designated group of employees. Under an EPSP, amounts are paid to a trustee to be held and invested for the benefit of the employees who are beneficiaries of the plan.

The general rule is that each amount allocated to an employee under an EPSP is included in the employee's income in the year the allocation of the amount is made, and it does not matter if the allocation is made on an absolute basis or not. Please note that such beneficiaries are not subject to tax on payments they receive from the trustee of an EPSP when payments are made, provided the payments represent amounts previously allocated to them. For more information on EPSPs, please refer to Interpretation Bulletin IT-379R, Employees Profit Sharing Plans - Allocations to Beneficiaries, available on the Canada Revenue Agency (CRA) Web site at www.cra.gc.ca/E/pub/tp/it379r.

Under subsection 90(1) of the Canadian Income Tax Act, a taxpayer resident in Canada is required to include in income an amount received as a dividend from a non-resident corporation. A dividend includes a stock dividend paid by the corporation.

You can find the rules governing the amount of a stock dividend and the cost of shares received as a stock dividend in the Act. These rules have been amended several times since 1972. In the case of stock dividend paid by a non-resident corporation to a Canadian resident shareholder, the shareholder must include in income an amount of the shares received. Generally, the cost of the shares received is the amount of a stock dividend. Therefore, attention should be given to the relevant definition of "amount" in the Act when calculating the amount of a stock dividend. For more information on stock dividends, please refer to Interpretation Bulletin IT-88R2, Stock Dividends, available at www.cra.gc.ca/E/pub/tp/it88r2.

For Canadian tax purposes, Canadian taxpayers who have been allocated a stock dividend by an EPSP must include in their income the amount of the stock dividend allocated, even though the value of their share account may not change. However, the cost of the shares received is the amount of the stock dividend.

The CRA is responsible for administering the tax system and applying the current tax legislation as enacted by Parliament, while the Department of Finance Canada is responsible for developing and evaluating federal income tax policy and amending income tax law. I am therefore forwarding a copy of our correspondence to the Honourable James M. Flaherty, Minister of Finance, for his consideration.

Under the existing provisions of the Act, the amount of a stock dividend is generally the amount of the increase in the paid-up capital of the corporation by virtue of the payment of the dividend. However, Finance Canada released legislative proposals on August 27, 2010, that included one to amend the definition of "amount" in subsection 248(1) of the Act. The new paragraph (b.1) of that definition provides that, in the case of a stock dividend paid by a non-resident corporation, the amount of any stock dividend is the greater of two amounts:

• the amount by which the paid-up capital of the corporation is increased by reason of the payment of the dividend; and
• the fair market value of the shares at the time of payment.

This proposed amendment applies to dividends declared on or after July 18, 2005.

It is the CRA's long-standing practice to ask taxpayers to file on the basis of proposed legislation. This practice eases both the compliance burden on taxpayers and the administrative burden on the CRA. If the proposed legislation is not beneficial to taxpayers, the CRA cannot require the taxpayer to file on the basis of proposed legislation. Nevertheless, taxpayers who file an income tax and benefit return based on the existing legislation may be liable to interest once the proposed legislation is enacted.

The new paragraph (b.1) of the definition of "amount" in subsection 248(1) of the Act was part of the proposals relating to foreign investment entities. In Budget 2010, Finance Canada announced that the foreign investment entity proposals would be replaced. The CRA recommends that taxpayers file Form T2029, Waiver in respect of the normal reassessment period or extended reassessment period, to protect their interests if the government announces that it will not proceed with a particular amendment. You can find this form on the CRA Web site at www.cra.gc.ca/E/pbg/tf /t2029.

I appreciate the opportunity to respond to your concerns.

Yours sincerely,

Gail Shea, P.C., M.P.

c.c.: The Honourable James M. Flaherty, P.C., M.P.
Minister of Finance
House of Commons
Ottawa ON K1A 0A6

XXXXXXXXXX
House of Commons
Ottawa ON K1A 0A6

Minguy Choi
613-957-2062
2011-041422