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Principal Issues: Whether in determining the amount to be included in the GRIP addition for 2006 of the recipient corporation in respect of a dividend received during a taxation year ended after 2000 and before 2006, one may consider the total amounts of full rate taxable income of the payer corporation for its taxation year 2001 to 2005?
Position: Yes, the total amounts of full rate taxable income of the payer corporation for its taxation years 2001 to 2005 have to be taken into account.
Reasons: Wording of the Act
2007-025084
XXXXXXXXXX S. Grégoire
(613) 957-2746
February 20, 2008
Dear Sir,
Subject: Increase in the General rate income pool (GRIP) for the first taxation year including any part of January 1st, 2006
This is in response to your letter of August 28, 2007, in which you requested our opinion regarding a particular aspect of the GRIP provided for in paragraph (c) of the description of A in subsection 89(7) of the Income Tax Act (the "Act"). In particular, you questioned whether it is correct to consider that the assessment of reasonableness as to the source of the dividend should be made in relation to all of the dividend-paying corporation's full rate taxable income for its 2001 to 2005 taxation years ("the Period").
Unless otherwise indicated, all statutory references herein are to provisions of the Act.
Your Interpretation
You are of the view that, for the purpose of determining whether a dividend received by a Canadian-controlled private corporation (CCPC) in calculating GRIP under paragraph (c) of the description of A in subsection 89(7), it is appropriate to take into account, inter alia, the total of all amounts each of which is the full-rate taxable income of the corporation that paid the dividend for each of the taxation years that ended in the Period, without regard to the year in which the dividend is paid in the Period.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the CRA's practice not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments. These comments may, however, not apply to your particular situation.
Under subsection 89(7), a CCPC may add an amount in respect of "full rate taxable income" as defined in subsection 123.4(1) in respect of taxation years that end in the Period in calculating its GRIP. Paragraphs (a) and (b) of the description of A in that subsection are relevant in this regard. Paragraph (c) is relevant to the addition of a dividend received by the CCPC in that same period. However, that addition is subject to a condition that it must be reasonable to consider that the dividend is attributable to "full rate taxable income" of the corporation that paid the dividend. In that regard, you argue that to the extent that the payment occurs during the Period, the total of the amounts each representing the full rate taxable income of the corporation paying the dividend for each of the taxation years ending during the Period should be considered, notwithstanding the year in which the dividend is paid.
To illustrate your point, your request contains a numerical example involving two corporations, Holdco 1 and Holdco 2, which respectively hold all the shares of the capital stock of two operating corporations, Opco 1 and Opco 2. Paragraph (a) or (b), as the case may be, of the description of A in subsection 89(7) for each of Opco 1 and Opco 2 would be nil for the taxation year ending in 2001, while it would be $100,000 for each of the taxation years ending in 2002 to 2005 inclusive. Each of the operating corporations would have paid a taxable dividend of $400,000 during the Period. Opco 1 would have paid that dividend in 2005, while Opco 2 would have paid such a dividend in 2001.
In your view, if only the amounts included in the GRIP of Opco 2 at the time the dividend was paid were to be considered for the purpose of determining the inclusion in respect of that dividend for the purposes of calculating the GRIP of the recipient corporation, no part of the dividend would be included in the GRIP of Holdco 2. However, if this analysis were carried out with respect to all the additions made to the GRIP for the entire Period, the entire dividend paid by Opco 2 would be considered in the calculation of the GRIP of Holdco 2. With respect to Holdco 1, the entire dividend paid by Opco 1 would be included in the GRIP of Holdco 1, regardless of the interpretation used. In your view, these divergent results for the same total "full rate taxable income" earned during the Period are inappropriate.
Paragraphs (a) and (b) of the description of A in subsection 89(7) allow the product of multiplying the total full rate taxable income earned by a CCPC in the period by 63% to be included in the CCPC's GRIP.
With respect to paragraph (c), it provides for the inclusion in the CCPC's GRIP of any dividend received by the CCPC in a taxation year ending in the Period from a "connected corporation" as defined in subsection 186(4) that was deducted by virtue of subsection 112(1) in computing its taxable income. In particular, paragraph (c) provides as follows:
all amounts each of which was deductible under subsection 112(1) in computing the corporation’s taxable income for a taxation year of the corporation (in this paragraph referred to as the “particular corporation”) that ended after 2000 and before 2006, and is in respect of a dividend received from a corporation (in this paragraph referred to as the “payer corporation”) that was, at the time it paid the dividend, connected (within the meaning assigned by subsection 186(4)) with the particular corporation, to the extent that it is reasonable to consider, having regard to all the circumstances (including but not limited to other shareholders having received dividends from the payer corporation), that the dividend was attributable to an amount that is, or if this subsection applied to the payer corporation would be, described in this paragraph or in paragraph (a) or (b) in respect of the payer corporation;
For its part, the description of B in subsection 89(7) states that any amount paid during the Period by the corporation as a taxable dividend reduces its GRIP. In view of this fact, it appears to us that in the example contained in your request, Holdco 2 could, by virtue of the provisions of subsection 89(7), include in the calculation of its GRIP the entire $400,000 dividend paid by Opco 2 in the 2001 taxation year.
In short, we believe that, in order to determine whether it is reasonable to consider that a dividend is attributable to one of the amounts referred to in paragraphs (a) to (c) inclusive of the description of A of subsection 89(7), it is necessary to consider the amounts included by virtue of these same paragraphs by the corporation that paid the dividend for the entire Period. Our position seems reasonable in light of the fact that the dividend-paying corporation must subtract any dividend paid during the Period when calculating its GRIP.
We hope you find our comments of assistance and thank you for bringing this matter to our attention. Should you require any additional information regarding this matter, please do not hesitate to contact us.
Maurice Bisson, CGA
Manager
Corporation Reorganizations and Resource Industries Section
Corporation Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
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