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 a fraction of a dividend can be designated as an eligible dividend.
Reasons: Wording of subsection 89(14).
January 10, 2011
Dear Mr. Chan:
This is in reply to your email of November 17, 2010 wherein you requested our views regarding the application of subsection 89(14) of the Act (footnote 1) in the circumstances described below.
You have provided the following facts:
1. The corporation is a CCPC incorporated in Ontario with several shareholders who are residents of Canada for income tax purposes.
2. Shareholder A owns common shares of the corporation. It is contemplated that the corporation will purchase for cancellation shareholder A's shares.
3. As a result of the repurchase of his common shares of the corporation, shareholder A would be deemed to receive a dividend from the corporation by virtue of subsection 84(3).
4. The corporation has a GRIP balance in excess of the amount of the deemed dividend.
5. The corporation proposes to designate a portion of the amount of the deemed dividend as an eligible dividend under subsection 89(14).
Your concern relates to whether subsection 89(14) would allow a portion of the deemed dividend to be designated as an eligible dividend.
Your request appears to relate to a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 ("IC-70-6R5") dated May 17, 2002. However, if the situation relates to a completed transaction a request must be made to your local Tax Services Office. We can, however, provide the following general comments.
In our view, the wording of subsection 89(14) requires that the entire amount of the dividend paid by a corporation must be designated as an eligible dividend. Therefore, it is not possible to designate a fraction of a dividend as an eligible dividend. We have previously stated that a designation under subsection 89(14) would not be accepted if a corporation attempts to designate a fraction of a dividend to be an eligible dividend (see documents 2008-0284961C6, 2007-0243141C6, and 2006-0217891Z0).
Our comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular IC 70-6R5, dated May 17, 2002.
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 The Act means the Income Tax Act R.S.C. 1985 (5th Supp.) c.1 as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.
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