5 May 2010 Roundtable, 2010-0363851C6 - Eligible Dividends and LRIP

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: Calculation of LRIP-Dividends paid to non-residents

Reasons: Wording of the legislation

2010 Ponoka Tax Roundtable

Question #14 Eligible dividends and LRIP

At the Canadian Tax Foundation's Annual Conference in 2008, the Canada Revenue Agency (the "CRA") confirmed that where a Canadian controlled private corporation ("CCPC") pays a dividend and makes a designation with respect to the full amount of the dividend under subsection 89(14), the portion of the dividend that is received by non-resident shareholders would not be considered an eligible dividend and would not reduce the CCPC's General Rate Income Pool ("GRIP"). The low rate income pool ("LRIP") of corporations other than CCPCs were not discussed.

In the CRA's view, where a corporation resident in Canada that is neither a CCPC nor a deposit insurance corporation (a "non-CCPC") and has a LRIP declares a dividend that is received by both Canadian resident and non-resident shareholders and makes the designation under subsection 89(14) with respect to the full amount of the dividend, does the portion of the dividend that is not an eligible dividend (because it is received by non-residents) reduce the non-CCPC's LRIP in determining whether the portion of the dividend that is an eligible dividend (because it is received by Canadian residents) gives rise to an excessive eligible dividend designation ("EEDD")?

CRA Response

Eligible dividends received by individuals resident in Canada benefit from an enhanced dividend tax credit. Under subsection 89(14), a corporation can designate any dividend as an eligible dividend. Where the designation is an EEDD made in respect of an eligible dividend paid by the corporation in the taxation year, the corporation is subject to an additional tax under Part III.1.

EEDD, made in respect of an eligible dividend paid by a corporation at any time in a taxation year, is defined under subsection 89(1) to mean the amount determined by the formula: A x B/C where "A" is the lesser of (i) the total amount of all eligible dividends paid by the corporation at that time; and (ii) the corporation's low rate income pool; "B" is the amount of the eligible dividend; and "C" is the total amount of all eligible dividends paid by the corporation at that time.

In general, in the case of a non-CCPC, an EEDD will arise to the extent that the corporation has a LRIP at the time such dividend is paid.

LRIP is defined in subsection 89(1) to be the amount, at any particular time in a particular taxation year, of a corporation that is a non-CCPC that is determined by the formula in that subsection. Pursuant to variable "G" of the formula, LRIP is reduced, among other things, by the total of all amounts each of which is a taxable dividend (other than, among other things, an eligible dividend) that became payable, in the particular taxation year but before the particular time, by the non-CCPC.

Where a non-CCPC pays a taxable dividend that is designated as an eligible dividend pursuant to subsection 89(14) and a portion of such dividend is received by persons resident and persons not resident in Canada, only the portion of the dividend that is received by persons resident in Canada is an eligible dividend. The portion of the dividend that is received by persons not resident in Canada is a taxable dividend that is not an eligible dividend. Provided the dividend became payable, in a taxation year, before the dividend was paid, that portion of the dividend paid and received by the non-residents will be an amount described in variable "G" of the formula and will be deducted in computing the non-CCPC's LRIP at any time in the taxation year after the dividend becomes payable.

It is a question of law when a dividend becomes payable. Depending on the circumstances, the possible application of paragraph (c) of the definition of EEDD in subsection 89(1) or the general anti-avoidance rule under subsection 245(2) to any of the foregoing would also have to be reviewed if transactions are undertaken to artificially manipulate a corporation's LRIP.

The foregoing is illustrated in the following numerical example. Assume that in a particular taxation year, a non-CCPC declares a dividend of $1 million to be paid on a single class of shares. 75% of such shares are held by persons resident in Canada. The remaining 25% of such shares are held by non-residents of Canada. The non-CCPC had a LRIP of $200,000 immediately before the dividend is declared. The non-CCPC makes a designation under subsection 89(14) with respect to the full amount of the dividend. The dividend is paid by the non-CCPC in the taxation year. The $750,000 portion of the dividend received by persons resident in Canada is an eligible dividend. The $250,000 portion of the dividend received by the non-residents of Canada is a taxable dividend that is not an eligible dividend. Provided the dividend became payable, in the taxation year, before it was paid, the $250,000 is included in variable "G" of the formula and will be deducted in computing the non-CCPC's LRIP at any time in the taxation year after the dividend became payable. The determination of whether an EEDD has been made with respect to the $750,000 eligible dividend paid by the corporation in the taxation year will be made at the time the dividend is paid based on the non-CCPC's LRIP at that time. Assuming that no other amounts are added to the non-CCPC's LRIP in the taxation year prior to the time that the dividend is paid, no EEDD will be made by the corporation in respect of the eligible dividend paid by the non-CCPC.