Section 89

Table of Contents

Subsection 89(1) - Definitions

Adjusted Taxable Income

Administrative Policy

20 June 2016 External T.I. 2016-0648481E5 F - Small business deduction and GRIP

CCPCs can choose to forego the small business deduction so as to maximize their GRIP

Can a corporation choose not to take the small business deduction to enable it to add an amount to its general rate income pool account ("GRIP "), so as to enable its shareholders to receive eligible dividends? After quoting the “may” be deducted language in the s. 125(1) preamble, CRA stated (TI translation):

Based on this text and especially that emphasized, we are of the view that a corporation has no obligation to deduct the small business deduction to which it is entitled. …

If no amount was deducted under subsection 125(1), no taxable income reduction [under D of the GRIP definition] would occur because of variable B [of the adjusted taxable income formula].

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125 - Subsection 125(1) SBD discretionary 37

Canadian corporation

Administrative Policy

88 C.R. - Q.9

A corporation incorporated in a foreign jurisdiction that is continued in Canada is not a Canadian corporation as it was not incorporated in Canada.

Capital Dividend Account

Cases

Canada v. Innovative Installation Inc., 2010 DTC 5175 [at 7317], 2010 FCA 285

receipt of insurance proceeds through debt repayment

In order to ensure payment of a loan owing by the taxpayer ("Innovative") to a bank (RBC) on the death of Innovative's principal (Mr Peacock), Innovative purchased key man insurance from Sun Life with RBC as the policyholder and funded the payment of premiums on the policy. When Mr Peacock died, Sun Life paid the insurance proceeds to RBC, which was contractually obliged to apply them to discharge the loan.

Evans JA found (at para. 6) that, for the purposes of determining Innovative's capital dividend account, "Innovative 'received' 'proceeds of a life insurance policy' when RBC applied them, as the contract required, to discharge Innovative's debt," and stated (at para. 9):

Paragraph 89(1)(d) does not require that a corporation receive the proceeds directly from the insurer or that it be named as the beneficiary of the policy. It only had to have "received" them in consequence of Mr Peacock's death.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt indirect receipt through debt repayment 156

See Also

CSI Development Corp. v. The Queen, 99 DTC 1139 (TCC)

McArthur TCJ. found that the amount added to the taxpayer's capital dividend account as the result of the realization by a partnership of an eligible capital amount should be based on the taxpayer's portion of the partnership's taxable income, rather than being 100% of the non-taxable portion of the receipt, as contended by the taxpayer.

Administrative Policy

3 December 2015 External T.I. 2015-0613761E5 F - Capital Dividend Account

exempting a capital gain doubles the CDA addition

Where a corporation donates ecologically sensitive lands so as to be eligible for the s. 110.1(1)(d) deduction, what amount will be added to its capital dividend account? CRA responded (TaxInterpretations translation):

[S]ubparagraph 38(a.2)(i) provides that the taxable capital gain resulting from the disposition of such property to a qualified donee described in subsection 149.1(1) (other than a private foundation) is equal to zero. Consequently, by virtue of the definition of capital dividend account provided in subsection 89(1), the capital gain resulting from such a disposition would be included by virtue of clause (a)(i)(A) of the definition as there would be no amount of taxable capital gain as described by clause (a)(i)(B) taking subparagraph 38(a.2)(i) into account. Accordingly, the full amount of the capital gain resulting from the disposition would be included in the capital dividend account of the corporation.

9 October 2015 APFF Roundtable Q. 6, 2015-0595551C6 F - Capital Dividend Account

capital loss does not eliminate positive CDA contribution of capital dividend received

If Holdco (a CCPC) has realized $1M in allowable capital losses on its public company portfolio, its subsidiary (Opco) has realized a $1M taxable capital gain from the sale of its operating business, and Opco then pays a capital dividend of $1M to Holdco, Holdco will have a resulting positive capital dividend account balance of $1M, as para. (a) of the CDA definition (respecting the non-taxable portion or non-deductible portion of capital gains or losses) will not reduce the positive CDA balance arising under para. (b) of the CDA definition from the receipt of the dividend – so that Holdco can then pay a capital dividend of $1M to its individual shareholder. However, if this dividend is not paid, the ability to do so will disappear if Holdco then amalgamates with Opco, as this will cause the CDA balance to go down to nil.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(z.1) amalgamation can cause a combined positive CDA balance to be zeroed 161

18 August 2014 External T.I. 2014-0540361E5 F - CDA and the deeming rules of 40(3.6) or 112(3)

no capital loss for CDA purposes where ss. 112(3) and 40(3.6) stop-loss rules apply

A corporation's capital dividend accounts will not be reduced by a loss on the redemption of shares held by it where such loss is deemed to be nil by s. 40(3.6) or 112(3), given that where s. 40(3.6) or 112(3) applies to deem its loss to be nil, it is not considered to have sustained a loss for the purpose of s. 39(1)(b). After referring to the "except as otherwise expressly provided" reference in the s. 40(1) preamble, CRA stated (TaxInterpretations translation):

Our longstanding position is…that subsection 112(3) is an express contrary indication. In accordance with subsection 112(3), the amount of a loss as [otherwise] calculated…is reduced in accordance with that subsection. The resulting loss...is considered to be the loss determined in accordance with paragraph 40(1)(b).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(b) ss. 112(3) and 40(3.6) stop-loss rules modify operation of s. 40(1)(b) 128

19 December 2013 Internal T.I. 2013-0490751I7 - Adjustment to a taxpayer`s CDA

s. 247(2) increase to ecp proceeds increased CDA on transaction effective date

The taxpayer, which was a private corporation, disposed of eligible capital property to a non-arm's-length non-resident sister company ("SisterCo") within the same multinational group in consideration for a promissory note. Audit proposed to apply s. 247(2) to increase the proceeds from the disposition. CRA stated:

[T]he proposed adjustment will result in an increase in the taxpayer's CDA effective to the date of the disputed transaction on the basis of the wording of subsection 247(2) and paragraph (c.2) of the definition of CDA… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(8) s. 247(2) trumps s. 69(1) 80

25 March 2013 External T.I. 2012-0447171E5 - Creditor's Group Life Insurance and CDA

addition of full death benefit for creditors' insurance

Creditor's group life insurance products generally have no cash surrender value, premiums payable with respect to a particular debtor for this type of products are generally calculated to cover the cost of insurance over the term of the certificate, that is, the term of the loan, and if an ACB calculation were effected with respect to each particular certificate holder, the result would generally be a very low figure, if not nil. On the basis of this understanding:

CRA is prepared to accept that the full amount of the death benefit be added to the corporate debtor's CDA, without a reduction by the ACB.

24 May 2012 External T.I. 2012-0441151E5 - Donation of flow-through shares - 40(12) and CDA

Where a private corporation holding flow-through shares as capital property gifts the shares to a qualified donee, it will include the capital gain from the gift in computing its CDA, but deduct an amount equal to the taxable portion of the deemed capital gain under s. 40(12).

8 May 2012 CALU Roundtable Q. 6, 2012-043564

Shareholders of a corporation use a buy-sell agreement to requires the corporation to acquire insurance on the shareholders' lives (and pay the premiums thereunder) to fund share purchase obligations under the agreement, and further agree to use a third party (the "Insurance Trustee") to hold and apply the insurance proceeds as directed under the agreement, with the corporation being required to pay any insurance proceeds over to the Insurance Trustee upon receipt. Before indicating that such proceeds would be added to the capital dividend account of the corporation as amounts received by it, CRA stated:

A trustee can reasonably be considered to act as agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee's only function is to hold legal title to the property. In order for the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trust to consult and take instructions from each and every beneficiary with respect to all dealings with all of the trust property.

8 May 2012 CALU Roundtable Q. 6, 2012-043564

On the same facts as for Q. 6.1 above except that the buy-sell agreement gives an irrevocable direction to the insurer to pay the proceeds over to the Insurance Trustee upon the death of a shareholder, CRA stated:

if the Insurance Trustee can reasonably be considered to act as agent for its sole beneficiary Corporation A such that the arrangement is deemed not to be a trust for the purposes of the Act, Corporation A may generally be considered to have received insurance proceeds for purposes of its capital dividend account provided that the irrevocable direction given by Corporation A to the insurer would not in any way negate the agency relationship between Corporation A and the Insurance Trustee.

8 May 2012 CALU Roundtable Q. 6, 2012-043564

On the same facts as for Q. 6.1 above except that the insurance policy names the Insurance Trustee as the beneficiary of the policy, for example, "as beneficiary in trust as bare trustee for the Corporation" - or simply names the Insurance Trustee without specific reference to its capacity as a bare trustee or agent, CRA stated:

if the Insurance Trustee can reasonably be considered to act as agent for its sole beneficiary Corporation A such that the arrangement is deemed not to be a trust for the purposes of the Act, Corporation A would generally be considered to have received insurance proceeds for purposes of its capital dividend account.

18 June 2007 External T.I. 2006-0215001E5 - Capital Dividend Account

partnership recognition of eligible capital amount increases partner CDA at end of partnership fiscal year

Each of the partners of a partnership with a fiscal period end of April 30, 200X and which disposed of eligible capital property in that year is a Canadian-controlled private corporation. CRA stated:

[T]he corporate partner's share of an amount required by paragraph 14(1)(b)…to be included in the partnership's income for its fiscal period ending April 30, 2000X would be included in the particular corporate partner's computation of its CDA at the end of the partnership's fiscal period such that it would be available to be paid to the corporate partner's shareholders as a capital dividend on or after May 1, 200X.

28 September 2006 Internal T.I. 2006-0202901I7 F - Subsection 80(4) - Impact on the CDA

A reduction of net capital losses pursuant to s. 80(4) would not be taken into consideration in computing a private corporation's capital dividend account given that s. 80(4)(b) has no effect on the amount of capital losses and allowable capital losses sustained by the taxpayer.

16 August 2004 External T.I. 2004-0090461E5 - Computation of Balance in Capital Dividend Account

A capital gains reserve taken in a taxation year will be included in the calculation of the capital dividend account balance on the first day of the subsequent taxation year.

4 December 2003 External T.I. 2003-0038595 - CAPITAL DIVIDEND ACCOUNT

"We would normally expect the partnership agreement to determine a particular partner's share of a capital dividend received by the partnership and the timing of its inclusion in the CDA of the partner. For example, if the partnership agreement provides that a particular corporate partner is entitled to a share of a capital dividend at the time the dividend is received by the partnership, we would allow that partner to include its share of the dividend in its CDA at that time. However, if the partnership agreement provides that a capital dividend received by the partnership is to be shared by the members of the partnership at the end of the partnership's fiscal period, a particular corporate partner would only be permitted to include its share of that dividend in its CDA at that time."

21 March 2002 External T.I. 2001-0115265 F - 89(1)(c.1)(i)&(c.2)(i) Capital Div. Acc.

delayed addition for goodwill

An addition to the CDA as a result of a disposition of goodwill can only be accessed through a capital dividend following the taxation year in which the disposition occurred. CRA stated (TaxInterpretations translation):

[T]he amount potentially included in income by virtue of paragraph 14(1)(b)...cannot be determined until the end of the taxation year... . Consequently, a corporation cannot include an amount in its CDA, respecting a disposition of goodwill...until the end of the taxation year during which such disposition took place.

22 November 2000 External T.I. 2000-0049415 - Dividends - General

"Where, for example, a particular corporation is a member of a partnership which realized a capital gain in its fiscal period ending April 30, 2001 and the corporation's taxation year ends on December 31, the corporate partner's share of the capital gain, (including the untaxed portion thereof), would be added to the partner's CDA at April 30, 2001, i.e., in the corporate partner's taxation year ending December 31, 2001."

26 June 1998 External T.I. 9729995 - 89(1), CAPITAL DIVIDEND ACCOUNT

Because the amount in paragraph (a) cannot be less than zero, a company had a positive capital dividend account as a result of disposing of eligible capital property notwithstanding that its capital dividends and capital losses exceeded its capital gains.

Income Tax Technical News, No. 10, 11 July 1997, "Life Insurance Policy Used as Security for Indebtedness"

26 July 1994 External T.I. 9415675 - CAPITAL DIVIDEND ACCOUNT

Where a corporation is the beneficiary of a life insurance policy but is not the policyholder and has, therefore, not paid the premiums in respect of the policy, the adjusted cost basis of the policy to the corporation will be nil, with the result that the full proceeds of the life insurance policy will be added to the corporation's capital dividend account.

15 February 1994 Ruling 9402353 - LIFE INSURANCE - CAPITAL DIVIDEND ACCOUNT

There is no requirement that the shareholders to whom a capital dividend is to be paid must have been shareholders at the time the corporation received the life insurance proceeds out of which the dividend will be paid.

20 October 1993 External T.I. 9323775 - CAPITAL ACCOUNT AND LIFE INSURANCE PROCEEDS IN TRUST

In order for life insurance proceeds to be included in the capital dividend account of a corporation, the proceeds must be considered to be received by the corporation. If the amounts are received by a trust, other than a bare trust, and then distributed to the corporation, they are not considered to have been so received. A corporation can be considered to have received the proceeds of a life insurance policy which it owned and on which it paid the premiums where it directed the payments to a third party provided the corporation was the beneficiary under the policy.

20 September 1993 External T.I. 9321275 - LIFE ANNUITIES

S.245 potentially could apply to a back-to-back insurance strategy which provided for the purchase of a term life insurance policy providing a death benefit equal to the premium paid to acquire a life annuity, if the purpose of the arrangement was to provide an addition to the capital dividend account in circumstances where the death benefit could be considered a return of an investment.

24 July 1992 T.I. 921605 (C.T.O. "Living Benefits and Capital Dividend Account")

An advance payment of part of the sum assured under a policy where the life expectancy of the insured is less than two years due to a medically incurable condition will not qualify as having been received "in consequence of the death of any person" because such phrase refers to amounts received after the death of the insured and not to amounts received in contemplation of her death.

23 March 1992 T.I. (Tax Window, No. 18, p. 22, ¶1824)

Where two personal holding companies each own 50% of the shares of Opco and each holding company is the owner of an insurance policy on the life of the individual shareholder of the other holding company and whose beneficiary is the other holding company, the full amount of the insurance proceeds will be added to the capital dividend account of the other holding company.

3 January 1992 Memorandum (Tax Window, No. 15, p. 8, ¶1682)

The capital dividend account with respect to a dividend paid part-way through the year was not reduced by the bankruptcy prior to that time of a corporation whose shares were held as an investment, because s. 50(1) did not deem the capital loss arising from the bankruptcy to occur until the year-end.

12 November 1991 T.I. (Tax Window, No. 13, p. 4, ¶1592)

Where an individual owns a life insurance policy and pays all the premiums, but a corporation is the beneficiary, the corporation will add the proceeds of the policy to its capital dividend account.

31 May 1990 T.I. (October 1990 Access Letter, ¶1468)

The amount of 1% of a price paid to the vendor of a winning lottery ticket under Lotto-Québec would not be included in the vendor corporation's capital dividend account.

31 January 1990 T.I. (June 1990 Access Letter, ¶1266)

In computing the capital dividend account of a corporation following the winding-up of the wholly-owned subsidiary, separate calculations must be made under ss.89(1)(b) and 87(2)(z.1).

9 November 89 T.I. (April 90 Access Letter, ¶1176)

A business investment loss is a capital loss, and therefore will reduce a taxpayer's capital dividend account.

89 C.R. - Q.49

A prior year's capital gains reserve is considered to come into the capital dividend account calculation at the beginning of the year.

Articles

Strain, "Estate Planning: Life-Insured Share Redemption Provides Advantages over Outright Buy Back", Taxation of Executive Compensation and Retirement, September 1993, p. 811.

Paragraph (a)

See Also

Gladwin Realty Corporation v. The Queen, 2019 TCC 62, aff'd 2020 FCA 142

contrary to purpose of the capital dividend rules to fully exempt a capital gains distribution

The taxpayer, a private real estate corporation, rolled a property under s. 97(2) into a newly-formed LP, with the LP then distributing to the taxpayer an amount approximating its capital gain of roughly $24M realized on closing the sale of the property. Such distribution generated a negative ACB gain to the taxpayer of that rough amount under s. 40(3.1) and an addition to its capital dividend account of roughly $12M (as this occurred before a 2013 amendment that eliminated such additions). The taxpayer recognized a further $24M capital gain at the partnership year end, which increased its CDA by a further $12M to $24M. It then promptly paid a $24M capital dividend to its shareholder. Later in the same taxation year, it was permitted to generate a capital loss of $24M under s. 40(3.12) to offset the s. 40(3.1) capital gain previously recognized by it.

Hogan J confirmed CRA’s application of s. 245(2) to reduce the taxpayer’s CDA by ½ the amount of the s. 40(3.1) capital gain, thereby generating Part III tax unless an s. 184(3) election was made. First, the CDA rule “was adopted to ensure that only one-half of a capital gain would be subject to income tax if the gain was realized indirectly by a private corporation” (para. 42), whereas here there was “over-integration,” i.e., the taxpayer purported “to pay a capital dividend equal to the entire capital gain realized from the sale of the Property” (para. 86).

Second, “the purpose and effect of subsection 40(3.1) are to dissuade taxpayers from extracting from a partnership on a tax-free basis funds in excess of their investment in the partnership” (para. 58) - and s. 40(3.1) “and the alleviating rule in subsection 40(3.12) were not enacted to encourage taxpayers to deliberately create offsetting gains and losses for the purpose of inflating their CDA” (para. 67).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) using the CDA and negative ACB rules to generate “over-integration” was abusive 594
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.1) purpose of s. 40(3.1) is to trigger gain on extraction of excess funds by passive partners 330
Tax Topics - Income Tax Act - Section 123.3 no CRA challenge to continuance to BVI to avoid s. 123.3 tax 96

Administrative Policy

22 January 2019 External T.I. 2019-0791631E5 - Calculation of Capital Dividend Account

subsequent capital loss does not reduce capital dividend room

In Year 1, a corporation paid a capital dividend based on a capital gain realized in that year. Would the realization by it of a capital loss in Year 2 result in an excess amount that engaged Part III tax? CRA responded:

The capital loss realized by Corporation Z in year 2 only affects the calculation of its CDA from that point forward such that the capital dividend paid by it in year 1 is not affected.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 184 - Subsection 184(2) subsequent capital loss did not generate excessive dividend 57

21 November 2017 CTF Roundtable Q. 4, 2017-0724051C6 - Timing of deemed gain under 55(2)

an immediate CDA addition for a non-redemption dividend subject to s. 55(2)

S. 55(2)(c) deems most dividends that did not arise on a share redemption and to which s. 55(2) applies to be gains “for the year,” without specifying when in the year the deemed gains occurred. In a reversal of the result in 2011-0412131C6 (which dealt with somewhat different statutory wording), CRA has now indicated that a gain under s. 55(2)(c) is deemed to be realized at the time of the payment of the dividend, with the result that there is an addition to the capital dividend account at that time rather than only on completion of the year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2) - Paragraph 55(2)(c) immediate CDA addition for s. 55(2)(c) dividend 173

S3-F2-C1 - Capital Dividends

S. 55(2) gains

1.31.1 An amount deemed to be a gain under paragraph 55(2)(c) is deemed to be realized on a disposition of a capital property at the time of the payment of the dividend for purposes of calculation of the CDA

Negative ACB gains

1.32 The capital gains and capital losses referred to in ¶1.27 do not include certain capital gains and capital losses that, pursuant to paragraph 40(3.1)(a) and subsection 40(3.12), arise from the deemed disposition of a member’s interest as:

  • a limited partner; or
  • a specified member of a partnership.

Gifts

1.34 For certain gifts, the entire capital gain is non-taxable. For example, for gifts of certain listed securities to qualified donees, paragraph 38(a.1) deems the taxable amount of a capital gain to be zero so that the non-taxable portion will be the full amount of the capital gain. ...

Flow-through shares

1.35 A special rule applies if the gifted security (or share disposed of in exchange for such security) is a property described in paragraph 38(a.1) that is included in a flow-through share class of property. Applicable to such gifts or dispositions made on or after March 22, 2011, the amount added to the CDA on account of the gifted security or exchanged share will be reduced. The reduction is equal to the taxable portion of a separate amount that is deemed by subsection 40(12) to be a capital gain in respect of the gifted security or exchanged share but which is not, itself, otherwise included in the calculation of the corporation’s CDA.

FAPI

1.39 Capital gains included in the foreign accrual property income of a foreign affiliate of a corporation cannot be added to the corporation’s CDA.

Understated reserves

1.40 ... Payment of a capital dividend during a tax year that is based on a calculation which overstates the actual balance in the CDA, because of an under-estimation of the amount of the reserve to be deducted at the year-end, may give rise to an assessment of Part III tax.

Capital gains reserve

1.41 The reduction to a corporation’s CDA balance in respect of a subparagraph 40(1)(a)(iii) reserve that was deducted at the end of a particular tax year is added back to calculate the CDA balance on the first day of the next tax year. ...

Timing of capital gains from partnership

1.42 Where a private corporation is a member of a partnership that realizes a capital gain, the relevant amounts in respect of the gain that are allocated to the corporate partner will be included in the calculation of its CDA at the end of the fiscal period of the partnership that ends in the corporation’s tax year.

Not affected by s. 34.2

1.43 Pursuant to paragraph 34.2(5)(b), a corporation’s CDA is not affected by any amounts arising from the application of section 34.2. Section 34.2 provides rules that adjust a corporate partner’s income to limit the deferral of tax where the partnership has a fiscal period that differs from the corporation’s tax year. It also provides rules for transitional relief.

1.44 Allowable capital losses forming all or part of a corporation’s net capital losses may not be deductible pursuant to subsection 111(4) because control of the corporation was acquired by a person or group of persons. However, the capital losses from which the allowable capital losses are derived will be included in the calculation of, and reduce Component 1 of the corporation’s CDA.

Excess capital losses not deducted from other components

1.45 ... When a capital loss is realized, the amount of the first component added to the corporation’s CDA is reduced. However, a negative balance in that component is not carried over to the computation of the CDA balance itself. This means that it does not reduce the aggregate amount of the other components included in the corporation’s CDA... .

17 August 2016 Internal T.I. 2016-0639251I7 - Capital Dividend Account and 149(1)(n)

exempt low-rental housing corp can use a CDA

Can an entity exempt under s. 149(1)(n) have and use a capital dividend account (“CDA”)? The Directorate responded:

[A] s. 149(1)(n) entity may qualify to have a CDA if it is a private corporation. … [T]he tax-free amount available to the shareholders of a corporation (including a corporate 149(1)(n) entity), through the CDA, will generally be limited to one half of the capital gain.

However, should it lose its exempt status, it also would lose its CDA under s. 89(1.2) – and the timing of the capital gains arising to it under the s. 149(10) disposition of its property would preclude those gains from being added to the available amount of its CDA.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1.2) deemed 149(10) gain does not add to CDA before it disapppears under 89(1.2) 163
Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(n) can have a CDA while exempt 89

29 November 2016 CTF Roundtable Q. 4, 2016-0671491C6 - 55(2) and Part IV Tax

s. 55(2) application to dividend as a result of a Pt IV tax refund does not generate CDA for on-payment of that dividend

Taking its RDTOH of $383,333 into account, Opco pays a taxable dividend of $1,000,000 to Holdco (its wholly-owning parent also with a calendar taxation year), so that Opco expects to receive a dividend refund of $383,333. Holdco then pays a $1,000,000 taxable dividend to its individual shareholder. Consequently, Holdco will pay Part IV tax of $383,333 but will be eligible for an offsetting dividend refund. Also assume no relevant safe income and s. 55(2.1)(b) applies to the dividend received by Holdco.

In Holdco’s tax return, it would report a $1,000,000 capital gain and no Part IV tax on the dividend, and Holdco would add $153,333 (30 2/3% of $500,000) to its RDTOH account. Therefore, Holdco elects to pay a capital dividend of $500,000 out of the $1,000,000 dividend and treats only the balance of $500,000 as a taxable dividend, which is sufficient to generate a full refund of the $153,333 of RDTOH. Does this work?

CRA responded by indicating that, consistently with Ottawa Air Cargo, the application of s. 55(2) depended on the actual payment of the Part IV tax, and the actual receipt of the refund of the Part IV tax. Accordingly, Holdco should file both an original return (reporting the Part IV tax owing, and its refund) and an amended return (adjusting for the application of s. 55(2) to the dividend received by Holdco). However, the amount of the taxable dividend paid by Holdco to the individual shareholder would not change.

Holdco’s s. 83(2) election would be invalid, as it would retroactively access the application of s. 55(2) to the dividend received from Opco. Consequently, the $500,000 CDA arising from s. 55(2)’s application will be available only for CDA elections made on future dividends.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2) repeal of the s. 55(2) exemption, for dividends for which the Part IV tax is refunded on on-payment to an individual shareholder, busts integration 93

5 October 2012 APFF Roundtable Q. 8, 2012-0454161C6 F - Computation of CDA and Acquisition of Control

CDA deduction for net capital losses not affected by their denial under s. 111(4)(a)

Where Mr. A, who owns 50% of the shares of a CCPC ("Holdco") having net capital losses of $200,000, purchases the other 50% shareholding of Mr. B, thereby giving rise to an acquisition of control of Holdco, such net capital losses will still be taken into account in computing the CDA of Holdco following the acquisition of control (Tax Interpretations Translation):

[T]he fact that Holdco's net capital losses are not deductible in computing its taxable income for a taxation year ending after the acquisition of control, by virtue of paragraph 111(4)(a), has no impact on the calculation of the CDA of Holdco. In fact, the calculation of a corporation's CDA is a cumulative calculation and no particular adjustment is provided for in a situation similar to the one you submitted.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) purchase of shares of cash-rich company could be part of abusive surplus strip 76

28 March 2012 External T.I. 2011-0412541E5 F - Compte de dividendes en capital

s. 89(12 deemd capital gain generates CDA addition

A deemed capital gain arising under s. 80(12) will result in an addition to the corporation's capital dividend account under (a)(i)(A) (with the taxable portion being deducted under (a)(i)(B).)

27 June 2011 External T.I. 2009-0350501E5 F - Gains et pertes sur change étranger

s. 39(2) gain or loss does not affect CDA until year end

A Canadian corporation acquires capital property at a cost of U.S.$90,000 and pays the purchase price 30 days later after the exchange rate has moved from Cdn.$1.10 to Cdn.$1.11. After concluding that this resulted in a capital loss of $900 under s. 39(2), CRA stated:

As stated in 2007-0234691I7, the capital gain or loss arising from the application of subsection 39(2) can only be determined at the end of the taxpayer's taxation year and only after considering all foreign exchange gains/losses realized/incurred in that taxation year. Consequently, the capital gains or losses resulting from subsection 39(2) will only affect the balance of the capital dividend account at the end of the taxpayer's taxation year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2) s. 39(2) gain or loss on USD-denominated purchase arises between acquisition and payment date 221

17 September 2009 External T.I. 2009-0310251E5 F - Interaction between sections 89 and 55

addition to CDA from redemption engaging s. 55(2) occurs at redemption time

S. 55(2) applied to the redemption by Opco of shares held by Holdco, given that the resulting s. 84(3) deemed dividend exceeded the safe income on hand attributable to the redeemed shares ("Safe Income"). Holdco made an s. 55(5)(f) designation. (a) When is the non-taxable portion of the s. 55(2) capital gain included in computing Holdco's capital dividend account ("CDA")? What if (b) no s. 55(5)(f) designation is made by Holdco, or (c) it is made late? CRA responded:

[(a)] [T]he non-taxable portion of the capital gain resulting from the redemption of the shares of the capital stock of Opco would be included in Holdco's CDC at the time of the disposition of such shares of the capital stock of Opco, i.e., at the time of their redemption.

… [(b)] [T[he total of the dividend referred to in subsection 84(3) would technically be deemed to be proceeds of disposition pursuant to paragraph 55(2)(b). That said, the inclusion in Holdco's CDA of the non-taxable portion of the capital gain resulting from the redemption of the shares of the capital stock of Opco would continue to occur on the disposition of those shares.

… [(c)] If Holdco made a late designation pursuant to paragraph 55(5)(f) and that designation was accepted …, such designation should be taken into account for the purposes of subsection 55(2). While such a designation would affect the amount to be included in Holdco's CDA as a result of the redemption of the Opco shares, it would not affect the timing of such inclusion. Thus, the inclusion in Holdco's CDA of the non-taxable portion of the capital gain resulting from the redemption of the Opco shares would continue to occur at the time of the disposition of the Opco shares.

Subparagraph (a)(i)

Administrative Policy

27 November 2018 CTF Roundtable Q. 2, 2018-0780071C6 - Impact of 55(2) deeming rules

53(1)(b)(ii) and 52(3)(a) exclusion limited to where 55(2) did not apply to the stock dividend or PUC increase

CRA will ensure that the taxpayer will not be penalized in the capital dividend account calculation where a stock dividend or paid-up capital increase was previously subject to s. 55(2). Thus, CRA will restrict the exclusion of 53(1)(b)(ii), and the similar provision found in s. 52(3)(a), in the calculation of the CDA, to situations where s. 55(2) did not apply to the stock dividend or the paid-up capital increase.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 52 - Subsection 52(2) property dividended has cost equal to FMV where subject to s. 55(2) 104
Tax Topics - Income Tax Act - Section 52 - Subsection 52(3) cost under s. 52(3) for stock dividend amount to which s. 55(2) applied 69
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(b) - Subparagraph 53(1)(b)(ii) no basis reduction for s. 84(1) dividend to which s. 55(2) applied 161
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3) - Paragraph 112(3)(b) - Subparagraph 112(3)(b)(i) stop-loss rule does not apply to the extent of the application of s. 55(2) 83

Clause (a)(i)A)

Administrative Policy

21 June 2017 External T.I. 2016-0678361E5 F - Capital Dividend Account

negative ACB gain realized by a partnership is subject to the exclusion for s. 40(3.1) gains when allocated to a partner

ACo and BCo is each a private corporation holding a 49.99% limited partnership interest in Holdings LP and having a calendar year end. On December 31 of a particular year, Holdings LP had a “negative” adjusted cost base of its interest in Realty LP of $300,000. The correspondent, after noting that (a)(i)(A) of the capital dividend account definition excludes a capital gain under paragraph 40(3.1)(a), suggested that ACo’s share of the “negative” ACB gain realized by Holdings LP could be included in ACo’s CDA, as this gain would not come from the disposition of ACo's interest in Holdings LP (and there was no deemed disposition of such interest) but, rather, from an allocation of income.

In finding that there would be no addition to ACo’s CDA, CRA stated:

[U]nder paragraph 96(1)(f), the amount of the income of the partnership for a taxation year from any source is the partner's income from that source to the extent of its share thereof. This income will generally retain its nature and characteristics. We are therefore of the view that a deemed capital gain under subsection 40(3.1) that is allocated by a partnership to one of its corporate partners would be subject to the exclusion stated in clause (a)(i)(A) of the definition of capital dividend account under subsection 89(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) a negative ACB gain retains its character when allocated 85

16 November 2011 External T.I. 2011-0423861E5 F - paragraph 53(1)b)

example of capital gain for CDA purposes being less than the s. 40 capital gain

Holdco, whose common shares of Opco have a nominal adjusted cost base ("ACB") and paid-up capital ("PUC"), a fair market value ("FMV") of $2 million and safe income on hand ("SIOH") attributable to those shares of $900,000, increases the PUC of those shares by $1 million, and transfers those common shares (or to be more precise, new common shares issued in replacement therefor on the PUC increase) to Opco for cancellation in consideration for the issuance by Opco of (i) preference shares of Opco having an FMV, PUC and ACB (determined under s. 85(1)(g)) of $1 million; and (ii) common shares having a FMV of $1 million and nominal PUC and ACB.

If s. 55(2) did not apply to the s. 84(1) dividend, then the ACB of the common shares of Opco held by Holdco following that PUC increase would be determined under s. 53(1)(b) as the excess of the s. 84(1) deemed dividend of $1 million minus $100,000, being the portion of that dividend that did not come out of SIOH - i.e., $900,000.

On the other hand, if s. 55(2) applied to the s. 84(1) dividend, the ACB of those common shares would be the excess of the s. 84(1) deemed dividend received by Holdco (which, by virtue of s. 55(2) would be limited to the SIOH of $900,000) over the nil portion of that deemed dividend that did not come out of SIOH hand - i.e., also $900,000.

Accordingly, in both scenarios, Holdco would realize a $100,000 capital gain on the "dirty s. 85" transfer of the common shares, i.e., the excess of the agreed amount of $1 million over the ACB of $900,000. No amount would be added to the proceeds of disposition of the common shares because of the exclusion under s. 55(2)(b); and CRA would not apply s. 55(2)(c).

Respecting the application of s. (a)(i)(A) of the CDA definition, CRA stated:

As indicated in Technical Interpretation No. 2011-0421141E5, in situations where it is determined that subsection 55(2) would not apply to a transaction or series of transactions or events, according to the proposed changes to the CDA definition, it would be necessary to recalculate the capital gain for the purposes of calculating the CDA as if the decrease in ACB provided for in subparagraph 53(1)(b)(ii) (as proposed) had not been effected. This would have the consequence that for the purpose of calculating the CDA, the capital gain added under clause 89(1)(a)(i)(A) of the CDA definition would be less than the capital gain calculated for the purposes of section 39. Thus, in [the dirty s. 85 exchange in[ Step 14 and in computing the CDA of Holdco, the proceeds of disposition to Holdco of the 2,000,000 common shares held in the capital stock of Opco would be $1,000,000 by virtue of paragraph 85(1)(a), and the ACB of those shares would also be $1,000,000 by reason of clause 89(1)(a)(i)(A) and paragraph 53(1)(b) (without taking into account subparagraph 53(1)(b)(ii)) (as proposed). Accordingly, no capital gain would be realized for the purposes of clause 89(1)(a)(i)(A) in such a context.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(b) example of application of s. 53(1)(b) on dirty s. 85 exchange of common shares with partial SIOH for high PUC/ACB prefs and low PUC/ACB common shares 295

14 October 2011 External T.I. 2011-0421141E5 F - Computation of capital dividend account

s. 89(1)(a)(i)(A) exclusion re s. 53(1)(b)(ii) is inapplicable if s. 55(2)(a) applied

A dividend computed under s. 84(1) is deemed not to be a dividend by s. 55(2)(a), and the share is disposed of at a gain. Is the addition of "computed without reference to subparagraphs 52(3)(a)(ii) and 53(1)(b)(ii)" to (a)(i)(A) of the CDA definition applicable?

Given that subparagraph 53(1)(b)(ii), as proposed on July 16, 2010, refers to "the portion of the total determined under subparagraph (i) that relates to dividends" and since the amount of the dividend deemed not to be a dividend under paragraph 55(2)(a) is not part of the total determined under subparagraph 53(1)(b)(i), that amount would also not be affected by subparagraph 53(1)(b)(ii). Thus, the proposed amendment to the CDA definition in subsection 89(1) to add the expression "computed without reference to subparagraphs 52(3)(a)(ii) and 53(1)(b)(ii)”, would have no impact when calculating the CDA of a corporation in such a situation.

7 October 2011 APFF Roundtable Q. 29, 2011-0412131C6 F - Subsection 55(2) and Capital Dividend Account

CDA addition from application of s. 55(2)(c) is only available in the following years

If in the year prior to the sale of Opco by Holdco, Opco pays a dividend to Holdco which is subject to s. 55(2), s. 55(2)(b) generally would apply to trigger a capital gain and, thus, an addition to the capital dividend account, at the time of the disposition of the Opco shares. However, if s. 55(2)(c) instead applied, there would be deemed to be a capital gain of the corporation for the year in which the dividend was received, so that the resulting addition to the capital dividend account could only be distributed in the following years.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2) - Paragraph 55(2)(c) dividend paid in contemplation of subsequent arm’s length share sale is part of proceeds of that sale 198

Articles

Rick McLean, Jeff Oldewening, Jonas Lau, "Capital Gains Stripping and Surplus Stripping", 2017 Annual CTF Conference draft paper

Use of high-PUC, low ACB shares to create CDA (pp. 4-5)

[T]he new rules denied the creation of ACB in shares issued on a stock dividend or pursuant to a PUC bump unless the taxable dividend was paid out of safe income on hand of the dividend payer. [fn 30: Subclause 52(3)(a)(ii)(A)(II) for a stock dividend, and subparagraph 53(1)(b)(ii) for a PUC bump.] …

The ACB denial rules can cause a parent's shares of its subsidiary to have mismatched tax attributes. For a stock dividend or a PUC bump to which the ACB denial rules apply, the shares of the subsidiary can have higher PUC than ACB. Where the redemption price of the shares is equal to their PUC, the parent may cause such shares of its subsidiary to be redeemed in order to realize a capital gain. Alternatively, the parent might dispose of those shares of the subsidiary in another manner, whether to a third party or pursuant to an internal reorganization, in order to realize the capital gain. In either case, on any disposition of its high-PUC, low-ACB shares of the subsidiary, the parent may increase its CDA by virtue of its realized capital gain. This enables a "mixing-and-matching" distribution of the parent's pre-existing safe income on hand from one source, such as its active business income, to an individual shareholder as a capital dividend, using its CDA created from a capital gain realized on any disposition of its high-PUC, low-ACB shares of the subsidiary.

Purpose of CDA penalty rule in s. 89(1) – CDA – (a)(i)(A) (pp. 5-6)

In recognition that the ACB denial rules created this surplus stripping opportunity,…[t]he CDA penalty denies the creation of CDA in respect of the portion of a realized capital gain that is preserved by the ACB denial rules….

[I]t is possible to argue that the CDA penalty recalculates ACB for purposes of CDA only in order to frustrate more modern surplus stripping. Where the ACB denial rules apply, the subsidiary's safe income on hand is converted into ACB, reducing the parent's built-in capital gain in its shares of the subsidiary. The parent may dispose of such shares of the subsidiary in order to realize a capital gain that was preserved by the ACB denial rules. The tax-free portion of this gain is included in the parent's CDA. As a result, the parent may make a "mixing-and-matching" distribution of its own pre-existing safe income on hand to an individual shareholder as a tax-free capital dividend.

Example illustrating punitive effect of CDA penalty rule (p. 6)

[A]n individual owns all of the shares of a private corporation resident in Canada (“Holdco”). Holdco owns all of the shares of another Canadian-resident corporation ("Opco") having a fair market value of $100, PUC of nil, and ACB of nil. Thus, Holdco's built-in capital gain in its Opco shares is $100. Assume that Opco's safe income on hand attributable to its shares held by Holdco is $25. Imagine that Opco miscalculated its safe income on hand attributable to its shares held by Holdco. Thus, Opco undertakes a PUC bump of $100, giving rise to a deemed dividend of $100.

On the PUC bump, the ACB to Holdco of its Opco shares does not increase by the full amount of the deemed dividend of $100. Rather, Holdco's ACB in the Opco shares increases only to the extent that the PUC bump is paid out of safe income on hand of $25. This more modest increase in ACB reduces Holdco's built-in capital gain in its Opco shares to $75, preserving the portion of the capital gain that was not attributable to safe income on hand….

[S]olely for calculating Holdco’s CDA, the ACB to Holdco of its Opco shares is increased by the full amount of the deemed dividend of $100. Therefore, any subsequent disposition of the Opco shares by Holdco does not give rise to a capital gain for purposes of computing Holdco's CDA. This is a punitive measure; on such a subsequent disposition, the portion of Holdco's realized capital gain that was preserved by the ACB denial rules cannot increase its CDA.

Avoidance of CDA penalty by setting PUC of stock dividend shares below estimated safe income (pp. 18-19)

[C]onsider a high-low stock dividend that is paid on common shares of a dividend payer that are held by the dividend recipient, consisting of preferred shares with a high redemption price (and thus fair market value) of $100, but a low stated capital (and thus PUC) of $40. The dividend payer's safe income on hand attributable to its common shares on which the stock dividend is received is $70….

By setting PUC of the issued shares below estimated safe income on hand, the CDA penalty can be avoided regardless of whether subsection 55(2) recharacterization is respected when determining the dividend "amount". In this example, subsection 248(1) sets the "amount" of the high-low stock dividend at the PUC of the preferred shares of $40. Subsection 55(2.2) adjusts this "amount" of the high-low stock dividend to $100 for the stipulated purposes in section 55. Subsection 55(2.3) bifurcates this $100 adjusted dividend "amount" into a safe income dividend of $70, and non-safe income dividend of $30, solely for purposes of section 55.

The methodology to compute the ACB to the dividend recipient of the preferred shares of the dividend payer issued on the stock dividend turns on whether the dividend "amount" is $40 as computed under subsection 248(1), or only $10 comprising the portion of that same dividend "amount" that remains after recharacterization under subsection 55(2). In each case, the ACB to the dividend recipient of the preferred shares is $100, and the CDA penalty does not apply. …

A high-low stock dividend having a redemption price (and thus fair market value) above safe income on hand, but stated capital (and thus PUC) below safe income on hand, is an optimal way to crystallize safe income on hand. This strategy avoids uncertainty concerning the dividend "amount", and preserves integration by avoiding the CDA penalty. The circumvention of the CDA penalty is not abusive. The reason is that, from a tax policy perspective, the CDA penalty is no longer needed to deter surplus stripping of the dividend payer's safe income on hand after the 2015 amendments.

Subparagraph (a)(ii)

Administrative Policy

23 July 2007 Internal T.I. 2007-0234691I7 F - Foreign Exchange Gains/Losses and CDA

s. 39(2) capital losses not deducted until year end

CRA indicated that since a capital loss was not recognized under s. 39(2) until the end of the taxation year, the deduction under the CDA account did not occur until that time.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2) FX losses sustained on the maturity of commercial paper deemed under s. 39(2) to be realized at year end, so that CDA deduction deferred until then 187

Paragraph (b)

Administrative Policy

30 August 2017 External T.I. 2017-0718311E5 F - Capital dividend account

late capital dividend election retroactively affects CDA of dividend recipient

CRA indicated that a late but valid capital dividend election retroactively validates the dividend so that the recipient of the dividend thereby has an addition to its capital dividend account at the time of the receipt of the dividend.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 83 - Subsection 83(3) a late s. 83(3) election causes a retroactive increase to the CDA of the corporate recipient of the dividend 204

S3-F2-C1 - Capital Dividends

Effect of excessive 83(2) election

1.47 ... [E]ven an excessive dividend is included in the recipient corporation’s CDA. However, if the payor corporation makes an election under subsection 184(3) in respect of the excessive dividend, the amount added to the recipient corporation’s CDA will be limited to the portion of the dividend that continues to be excluded from the recipient corporation’s income under subsection 83(2).

Timing of partner's inclusion of capital dividend

1.49 ... [I]f the partnership agreement provides that a particular corporate partner is entitled to a share of a capital dividend at the time the dividend is received by the partnership, the partner would add its share of the dividend to its CDA at that time.

25 August 2011 External T.I. 2011-0417511E5 F - CDA and Excessive dividend

excess capital dividend does not reduce payor’s CDA and increases corporate shareholder’s CDA

A private corporation elected under s. 83(2) on a dividend amount in excess of its capital dividend account (CDA), and it paid Part III tax under s. 184(2). Does that excess affect the subsequent CDA computation? CRA responded:

[S]ubsection 83(2) ensures that the portion of the dividend covered by an election pursuant to subsection 83(2) that exceeds the CDA immediately before the time the dividend becomes payable, is not deemed to be a capital dividend. … [T]he excess portion … would not reduce the subsequently-computed CDA of the corporation that paid the dividend.

Furthermore, subject to an election under subsection 184(3), paragraph 83(2)(b) results in no part of a dividend that is the subject of an election made under subsection 83(2) being included in computing the income of any shareholder. … [A]ny corporate shareholder would add to its CDA the entire dividend designated under the subsection 83(2) election (including the excess of the dividend on the capital dividend), provided that the dividend payor has not made an election pursuant to subsection 184(3).

14 June 2007 Internal T.I. 2007-0229311I7 F - Capital Dividend Account

recording of dividend payable and dividend receivable between sub and parent was insufficient to constitute the payment of a capital dividend, so that there was no CDA addition

Subco declared a dividend payable to its parent (Parentco) which, in turn, declared a corresponding dividend to its individual shareholder, with a s. 83(2) election being made in both cases. When, on audit, CRA noted that the dividends declared were not recorded in the books of account of Parentco and Subco and that there were not cash payments, the accountant recorded book entries for Subco and Parentco showing amounts due for the dividends. In finding that this was insufficient to give rise to a capital dividend “received,” so that there had been no addition to the capital dividend account of Parentco, the Directorate stated:

[T]he mere making of the accounting entries … does not in itself constitute the payment of a dividend … by either Subco or Parentco.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt making accounting entries does not constitute payment of a dividend 130
Tax Topics - Income Tax Act - Section 184 - Subsection 184(3) invalid payment of capital dividend (because no payment) was subject to Pt. III tax (given valid s. 83(2) election) for which no s. 184(3) election could be made as no payment 135
Tax Topics - General Concepts - Effective Date a declared dividend cannot be revoked 158

Paragraph (c.1)

See Also

Non Corp Holdings Corp. v. Canada (Attorney General), 2016 ONSC 2737

capital dividend incorrectly dated before year end

Following the sale of a business giving rise to a “capital gain” (likely, goodwill proceeds), the dividend of the targeted capital dividend amount was paid on the first day of the following year, but the resolution declaring the dividend was dated the last day of the current year. Dunphy J granted a rectrification order to change the dividend declaration date to the following payment date (as required by CRA in order to reverse the Part III tax).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Rectification & Rescission date of capital dividend declaration rectified to eliminate Part III tax 192

Paragraph (d)

Administrative Policy

8 July 2020 CALU Roundtable Q. 2, 2020-0842141C6 - Return of premiums on death & CDA

a refund of premiums on death under a life insurance policy can increase the CDA of the corporate owner

A private corporation is the owner and beneficiary of an exempt life insurance policy (with an adjusted cost basis of $90,000) on the life of a shareholder, who dies from, say, suicide or skydiving, which does not void the policy, but instead results in the insurer repaying all premiums ($100,000). Is there a CDA addition of $10,000 under para. (d) respecting the receipt of “proceeds of a life insurance policy... of which the corporation was... a beneficiary" received as a “consequence of the death of any person." Also, pursuant to para. (j) of s. 148(9) - “disposition,” is there no disposition in relation to an interest in a life insurance policy? CRA responded:

A disposition of an interest in a life insurance policy is defined in subsection 148(9) of the Act and specifically excludes a payment made under an exempt life insurance policy as a consequence of the death of a person whose life was insured under the policy. …

Where proceeds of a life insurance policy are received by a corporation as a beneficiary under an exempt life insurance policy in consequence of death of any person, the proceeds would not, in our view, generally be received as the result of a disposition in relation to an interest in a life insurance policy under subsection 148(9) of the Act. Furthermore, pursuant to the definition of CDA in subsection 89(1) of the Act, the amount by which such proceeds exceed the amounts described in subparagraphs (d)(iii) to (d)(vi) of the CDA definition would be included in the corporation’s CDA.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Disposition - Paragraph (j) a refund of premiums on death under a life insurance policy does not entail its disposition 122

2016 Ruling 2015-0624611R3 - Capital Dividend Account

proceeds of predecessor’s policy added to Amalco’s CDA when received
Background

A life insurance policy (the “Policy”) was issued to B, and subsequently transferred by him to Canco 1, so that Canco 1 became the beneficiary. Following his death and incorrect advice that the Policy had previously been cancelled, his estate sold Canco 1 to a third party (Canco 2). Following the two corporations’ amalgamation to form Amalco, the insurer issued a cheque to Canco 1, which was deposited by B’s widow (M) in the name of Canco 1.

Proposed transactions

Amalco will declare and pay to its Class J shareholders a dividend out of its capital dividend account, equal to the amount of the insurance proceeds received on the Policy, with the board electing under s. 83(2) on the full dividend amount. Those shareholders will then pay the proceeds, net of Amalco’s transactions costs, to M.

Rulings

Pursuant to s. (d)(ii) of “capital dividend account,” the Policy proceeds received by Amalco that exceed the Policy ACB to Canco 1 will be included in Amalco’s CDA, and s. 83(2.1) will not apply to the dividend.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 83 - Subsection 83(2.1) transactions to rectify an overlooked life insurance policy of an amalgamated target 154

S3-F2-C1 - Capital Dividends

Reductions under (d)(v) to CDA addition on death

1.60.3 The third and fourth amounts, described in subparagraphs (d)(v) and (vi) of the definition of CDA, apply where all of the following conditions are met:

  • the proceeds of the particular life insurance policy were received in consequence of the death of a person after March 21, 2016,
  • after 1999 but before March 22, 2016, an interest in the policy was disposed of by a policyholder that was not a taxable Canadian corporation, and
  • subsection 148(7) applied to the disposition (the interest was disposed of by way of a gift, by distribution from a corporation or by operation of law only to any person, or in any manner whatever to any person with whom the policyholder was not dealing at arm's length).

1.60.4 Where all of the conditions in ¶1.60.3 are met, the amount otherwise added to the CDA of a corporation in consequence of a person’s death is reduced under subparagraph (d)(v). Generally, the reduction under clause (d)(v)(A) is the amount by which the fair market value of the consideration given in respect of the disposition of the policy exceeded the greater of the value of the interest in the policy (generally, the cash surrender value) and the adjusted cost basis of the policy to the policyholder immediately before the disposition. Adjustments to the amount of the reduction under subparagraph (d)(v) may be required by subclause (d)(v)(A)(II) and clause (d)(v)(B), together with paragraphs 148(7)(c) and (f), where the paid-up capital of a corporation was increased in connection with any such disposition, depending on whether any portion of that increase was extracted before March 22, 2016.

1.60.5 Where all of the conditions in ¶1.60.3 are met, another reduction to the CDA may be required by subparagraph (d)(vi) where, generally, the adjusted cost basis of the interest in the policy to the policyholder immediately before the disposition exceeded the value of the interest in the policy at the time of the disposition.

Deduction of ACB

1.65 ... [T]he amount added to a corporation’s CDA in respect of the receipt of life insurance proceeds as a result of the death of a person on or after March 22, 2016 will be limited to the amount by which the proceeds exceed the adjusted cost basis of a policyholder’s interest in the policy, regardless of whether the particular corporation is the policyholder. ...

Addition of full or net death benefit

1.69 Where a death benefit is paid pursuant to a creditor’s group life insurance policy, the CRA will permit the full amount of the death benefit (as opposed to the net proceeds) to be added to the debtor’s CDA provided the policy is a term and non-participating policy with no cash surrender value, designed to pay the outstanding balance of the debtor’s debt upon death of the life insured.

1.70 Where a death benefit is paid pursuant to a life insurance policy owned by the debtor as policyholder, only the net proceeds may be added to the debtor’s CDA.

Calculation of distributable amount

1.77...

In year 1 Corporation Z realizes a capital gain of $200,000 , of which $100,000 represents the non-taxable portion. Later in that year the corporation pays a dividend of $100,000 from the CDA.

In year 2 Corporation Z realizes a capital loss of $100,000 of which $50,000 represents the non-deductible portion.

In year 3 Corporation Z receives net proceeds of a life insurance policy in the amount of $100,000 .

The amount that Corporation Z could pay from the CDA immediately after receipt of the life insurance proceeds would be calculated as follows:

  • Component 1 adds $50,000 to the balance, being the non-taxable portion of the capital gain realized in year 1 minus the non-deductible portion of a capital loss in year 2 ($100,000 - $50,000);
  • Component 4 adds $100,000 to the balance, being the net life insurance proceeds realized in year 3; and
  • Component 6 reduces the balance by $100,000, being the capital dividends paid in year 1.

As a result, Corporation Z’s CDA balance is $50,000.

19 November 2009 External T.I. 2007-0257251E5 F - Assurance-vie

CDA addition to beneficiary not reduced by ACB of policy to the different policyholder - but s. 246(1) or 245(2) germane

For the purpose of calculating its capital dividend account, is a corporation that is a beneficiary of a life insurance policy required to take into account the adjusted cost base of that policy to the other corporation that owns the policy? CRA responded:

The calculation of the adjusted cost basis of a life insurance policy is performed only for the policyholder. In this situation, the proceeds of a life insurance policy that are included in paragraph (d) of the capital dividend account of the corporation that is the beneficiary of the policy in subsection 89(1) are not reduced by the adjusted cost basis of the policy that was held by another corporation before the death of the insured.

CRA went on to state:

[S]ubsection 246(1) could apply on a case-by-case basis in a situation where the parent corporation that is the holder of a life insurance policy designates a subsidiary as the beneficiary.

…[T]he series of transactions described in your letter appear to be for the purpose of obtaining tax benefits and could be considered abusive for the purposes of subsection 245(4).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Disposition - Paragraph (d) disposition by operation of law if there is a new contract 162
Tax Topics - Income Tax Act - Section 148 - Subsection 148(10) - Paragraph 148(10)(d) designation of a different beneficiary does not entail a disposition 132
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) s. 15(1) benefit where sub is policyholder and premium payer and parent is beneficiary – but not for reverse 223

Subparagraph (d)(ii)

Administrative Policy

8 July 2020 CALU Roundtable Q. 3, 2020-0842151C6 - Insurance Proceeds & CDA

the two components received under a “face amount plus fund value” universal life policy are included in computing the corporate policy owner’s CDA

A universal life (UL) policy (referred to as “face amount plus fund value”) purchased by Opco as an exempt policy upon the life of its shareholder provides for the payment of a death benefit equal to the fund value of the policy (being the accumulated balance of the investment accounts within the policy at the time of the death of the life insured) plus the face amount. Following the shareholder’s death, the insurer pays Opco the face amount of $200,000 plus the fund value of $20,000. Would the “proceeds of a life insurance policy” to Opco for purposes of s. (d)(ii) of the capital dividend account definition equal to the full $220,000 death benefit received by Opco? CRA responded:

In the fact pattern described above, the particular payment made by the insurer to Opco was for two amounts. The first was the face amount of the policy and the second was the balance in the investment account that had accumulated within the exempt single-life policy up to the time of the death of the life insured. In this fact pattern, it is our view that the total of these two amounts would be “proceeds of a life insurance policy” for purposes of subparagraph (d)(ii) of the definition of “capital dividend account” in subsection 89(1) of the Act.

5 October 2012 Roundtable, 2012-0453231C6 F - Creditor's Group Life Insurance and CDA

Innovative case extended to individual policy: credit to borrowing CCPC’s CDA

Under an individual policy for loan insurance purchased by a borrowing corporation, the death benefit on the insured’s death is applied to repay the balance of the loan owing to the lender, with the ultimate excess being returned to the borrowing corporation. Would there be a credit to the borrowing corporation’s capital dividend account (“CDA”) of the excess of the entire death benefit over the adjusted cost basis (“ACB”) of the policy? CRA responded:

Innovative [dealt with] a group creditor life insurance policy and not an individual life insurance policy. …[I]t would be reasonable to apply the same position in [Innovative to an individual life policy] provided that the borrowing corporation is able to demonstrate that the proceeds of the life insurance policy paid directly to the lending financial institution reduced the loan balance owing by the borrowing corporation to the financial institution, in accordance with existing contractual relationships between the parties.

In such a situation, any ACB of the borrowing corporation, being the holder of the life insurance policy, would reduce the amount that could be added to its CDA, where applicable.

7 October 2011 Roundtable, 2011-0407291C6 F - Group Life Insurance Policy

CDA addition for receipt of proceeds of policy on life of shareholder

Professionals practising through a professional corporation hold a group term life insurance certificate as an insured, for which the policyholder is a professional association of which the insured is a member. They transfer the insurance certificate to their corporation so that it pays the premiums and receives the insurance proceeds on their death.

Would the life insurance proceeds paid to the corporation as a result of the death of the insured be added in the calculation of the capital dividend account ("CDA") under s. (d)(ii) the definition? Would the answer be the same if, by law, the insurance certificate were to continue to be issued in the name of the insured individual and the corporation was designated as the beneficiary of the proceeds of the insurance and paid the insurance premiums?

CRA responded:

Where a corporation is the beneficiary of a group term life insurance policy (of which the corporation was not a beneficiary on or before June 28, 1982) and receives proceeds of the insurance policy as a result of the death of a member who has designated the corporation as a beneficiary by virtue of the master agreement for the policy, the proceeds may ordinarily be added in the calculation of the corporation's CDA pursuant to subparagraph (d)(ii) of the CDA definition in subsection 89(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) s. 15(1) could possibly apply where a professional corporation pays the premiums, and is designate the beneficiary, of a policy in name of professional 148

4 July 2011 External T.I. 2011-0401991E5 F - CDA and life insurance proceeds

CRA will follow Innovative Installation

Innovative Installation found that proceeds of an insurance policy (whose premiums had been paid by a corporation (Innovative)) that the insurance company was required to pay over to a lender to Innovative in order to pay off the loan were an addition to the capital dividend account (CDA) of Innovative, as an amount of insurance proceeds that had been received by it. What is the CRA response to this case?

CRA stated:

In factual situations similar to the Innovative case, the CRA will apply the position adopted by the Court in that case.

Consequently, in a situation where a corporation can demonstrate that life insurance proceeds that were paid directly to a financial institution have reduced its debt to the financial institution, the life insurance proceeds will be considered as "received" by that corporation for the purpose of applying subparagraph (d)(ii) of the definition of CDA … .

In addition, comments in paragraph 6 of … IT-430R3 … will be modified … .

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt Insurance proceeds received by borrower where applied to repay its loan 92

Subparagraph (d)(iii)

See Also

Rogers Enterprises (2015) Inc. v. The Queen, 2020 TCC 92

2016 amendment changed the law so as to reduce CDA bump by policyholder’s ACB

Sommerfeldt J. found that there was no abuse under s. 245(4) where, following the death of the insured in 2008, a corporate beneficiary’s capital dividend account was increased by the full insurance proceeds of $102M received by it rather than only by the excess of those proceeds over the adjusted cost basis of the policies to the policyholders (being mostly a grandparent with an ACB of $42M). In 1977, there had been a legislative change to reflect a policy that the addition to a corporate beneficiary’s CDA would now only be reduced by the policy’s ACB to it rather than by the ACB of the policy to any person. Accordingly, taking advantage of the fact that CGESR itself had a nil ACB for the policies, so that the bump to its CDA was $102M rather than $60M ($102M - $42M), accorded with the object and spirit of the provisions.

Furthermore, respecting a 2016 amendment (para. 105):

[N]otwithstanding the self-serving language and ambiguity in the Budget Supplementary Information and the Explanatory Notes issued by Finance in 2016, the object, spirit and purpose of the Reduction Provision, as amended, had clearly changed. After March 21, 2016, the object, spirit and purpose of the Reduction Provision, as amended, was to refer to the adjusted cost basis of a policyholder’s interest in the particular policy in order to determine the amount that could be added to the capital dividend account of a corporate beneficiary, even where that beneficiary was not the policyholder.

­­­­­­­­­­­­­­­­­­­

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(1) - Tax Benefit no tax benefit where alleged excessive CDA addition was not distributed to individual shareholders 498
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) taking full credit to the CDA for insurance proceeds received, notwithstanding a positive ACB of the policyholder, reflected the policy of the CDA text 415

Administrative Policy

8 May 2018 CALU Roundtable Q. 2, 2018-0745811C6 - CDA credit - joint ownership

double deduction of the ACB of a joint corporate-held life insurance policy in computing the CDA addition to the two corporate beneficiaries of the proceeds

Opco, which is owned 50/50 by the respective wholly-owned holdcos of Messrs. A and B (Holdco A and Holdco B) jointly owns with Holdco A (and Holdco B) an exempt life insurance “Policy A” on the life of Mr. A (and an exempt life insurance “Policy B” on the life of Mr. B), each of which names Opco as the beneficiary for $1 million and Holdco A (or B) as to the excess.

Opco pays the premium relating to $1 million of death benefit coverage in each case, and Holdco A and Holdco B make additional deposits on an annual basis into their respective joint policies.

On Mr. A’s death, the total death benefit to be paid under Policy A is $1.2 million and the adjusted cost basis (“ACB”) of Policy A is $150,000. What will be the addition to Opco’s and Holdco A’s CDA with respect to the total death benefit paid under Policy A? CRA stated:

As we noted in 2017-0690311C6, where there are multiple corporate beneficiaries designated under a policy, it is our view that each beneficiary must apply paragraph (d) of the definition of CDA independently. For the purposes of determining the addition to each beneficiary’s CDA, the portion of the death benefit received by each beneficiary must be reduced by the total of all amounts each of which is a policyholder’s ACB. In other words, the addition to each beneficiary’s CDA should be reduced by the total ACB of the life insurance policy.

[Here] the addition to the CDA of Holdco A with respect to the death benefit would be $50,000 ($200,000 death benefit received by Holdco A reduced by the total ACB of the policy which is $150,000). The addition to the CDA of Opco with respect to the death benefit is $850,000 ($1,000,000 death benefit received by Opco reduced by the total ACB of the policy which is $150,000).

18 May 2017 Roundtable, 2017-0690311C6 - CLHIA 2017 - Q1 CDA

no ACB proration where multiple corporate beneficiaries

Corporation A is the sole owner and premium payor for a life insurance policy with a death benefit of $1 million on the life of Mr. A. Corporation B and Corporation C are each designated as beneficiaries for 50% of the death benefit under this policy. Mr. A dies after March 21, 2016 at a time when the ACB of the policy to Corporation A is $200,000. Is $400,000 added to the CDA of each of Corporation B and Corporation C?

Before indicating that the CDA addition for each corporation was $300,000 (=$500,000-$200,000), CRA stated:

Where there are multiple corporate beneficiaries designated under a policy…for the purposes of determining the addition to each beneficiary’s CDA, the portion of the death benefit received by each beneficiary must be reduced by the full ACB of a policyholder’s interest in the policy. The wording of subparagraph (d)(iii) does not provide for a proration of the ACB in cases of multiple corporate beneficiaries.

Finance

6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.7

the double deduction of the ACB of a corporate held life insurance policy in computing the CDA addition to two corporate beneficiaries of the proceeds, is anomalous

In 2017-0690311C6, Corporation A was the sole owner and premium payor for a life insurance policy with a death benefit of $1 million on the life of Mr. A. Corporation B and Corporation C were each designated as beneficiaries for 50% of the death benefit under this policy. Mr. A died after March 21, 2016 at a time that the adjusted cost basis (ACB) of the policy to Corporation A was $200,000. CRA considered that the addition to the capital dividend account (CDA) of each of Corporation B and Corporation C was $300,000 (=$500,000-$200,000), not $400,000, i.e., the full ACB reduces the CDA addition for each rather than being prorated. Could Finance comment on this situation? Finance responded:

[S.] (d)(iii) of the CDA definition has been amended to provide that the amount, that can be added to a corporation's CDA when proceeds are received pursuant to a life insurance policy under which the corporation is a beneficiary, is reduced by the total of the amounts each of which is the ACB of a policyholder’s interest in the policy.

The Department of Finance is prepared to address this issue as part of its ongoing review of the rules of the Income Tax Act.

Paragraph (g)

Administrative Policy

14 May 2013 External T.I. 2012-0469591E5 F - Capital dividend received by a trust and CDA

no addition for capital dividend received by trust in Year 1 and distributed in Year 2 to corporate beneficiary

A Canadian-controlled private corporation paid a capital dividend to its sole shareholder, a trust, in 20x1. The beneficiaries of the trust were Mrs., minor children of Mr. and Mrs., and any corporations controlled by Mr. This capital dividend was not distributed by the trust in 20x1 as the children and Mrs. were designated persons and no corporation controlled by Mr. yet existed. Such a corporation was formed in 20x2.

CRA first noted that as the dividend was not payable to a beneficiary in 20x1, no s. 104(20) designation could be made in that year. As for 20x2, no s. 104(20) designation could be made for any distribution to the new corporate beneficiary in respect of a capital dividend received by the trust in the preceding year.

Turning to para. (g) of the CDA definition, CRA stated:

[T]he trust would not be able to allocate in 20X2 an amount to the newly formed corporation under subsection 104(20) in respect of the capital dividend paid to the trust in 20X1. As a result, the newly formed corporation would not be able to add to its CDA the amount received from the trust in respect of this dividend.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(20) no recognition of capital dividend by corporate beneficiary where received by trust in Year 1 and distributed in Year 2 127

3 May 2010 External T.I. 2010-0358471E5 F - Capital dividend account - beneficiary of a trust

capital dividend distributed by trust in its year and designated under s. 104(20) is added to corporate beneficiary’s CDA only at end of trust’s taxation year

A trust received a capital dividend form a corporation and distributed it in the same year to a corporate beneficiary, and made a designation under s. 104(20) respecting such distribution. In indicating that the distributed amount should only be added to that corporation’s capital dividend account at the end of the trust's taxation year rather than as soon as the corporation received the distribution, CRA stated:

If the amount had been paid before the end of the trust's year, we are of the view that when the amount was received by the beneficiary corporation, we would not know whether the trust satisfied the condition that it had been resident in Canada throughout its taxation year. In addition, there would be no amount designated by the trust in respect of the dividend before the end of its taxation year since the designation is made in its income tax return filed for the taxation year in which it received the capital dividend.

Excessive Eligible Dividend Designation

Administrative Policy

11 October 2013 APFF Roundtable, 2013-0495781C6 F - GRIP Exceeds Safe Income

detailed review required to determine whether creation of preferred share dividend to flow out GRIP in excess of SIOH generatd EEDD

Targetco is a CCPC owned by Sellco (also a CCPC) and has a GRIP account of $2.6M. However, the safe income on hand of Sellco in respect of the Targetco shares is only $2M. A dividend received by Sellco in excess of $2M would not augment its own GRIP. Accordingly, it is proposed that:

  1. Targetco pays a dividend of $2M out of its safe income and also designates it as an eligible dividend under s. 89(14).
  2. Sellco subscribes for $0.6M of preferred shares of Targetco.
  3. The paid-up capital of the preferred shares is reduced to a nominal amount without any distribution being made.
  4. Targetco redeems the preferred shares for $0.6M and designates the $0.6M deemed dividend under s. 89(14). S. 55(2) does not apply as the shares' ACB is $0.6M.

Respecting whether Targetco would be considered to have made an "excessive eligible dividend designation" under (c) of the definition, CRA stated (TaxInterpretations translation):

In the situation described above, Targetco is the only corporation which will pay a dividend and whose GRIP will be reduced. The contemplated transactions will not, by themselves, have the effect of maintaining or increasing the GRIP of Targetco. Consequently, the contemplated transactions, by themselves, would not engage paragraph (c) of the EEDD definition.

However, on a subsequent payment (after the contemplated transactions) of an eligible dividend by Sellco, it would be necessary to examine whether paragraph (c) of the definition of EEDD and subsection 185.1(1) were applicable with respect to Sellco.

General Rate Income Pool

Administrative Policy

20 February 2014 External T.I. 2013-0480051E5 F - Eligible dividend and safe income

full amount of designated dividend reduces payor's GRIP even though recipient's GRIP increased only by safe income portion

Holdco, which is unrelated to Opco or any other shareholder, holds 30% of both the Class A common and Class B preferred shares of Opco. Its Class B preferred shares have a redemption amount of $600,00, an adjusted cost base of $180,000, a nominal paid-up capital and attributable safe income on hand of $75,000. Opco's GRIP is $250,000. Opco redeems Holdco's Class B preferred shares for $600,000 and makes s. 55(5)(f) designations so that there are deemed to be separate dividends totalling $75,000.

If Opco designates $250,000 of the deemed dividends as an eligible dividend, its GRIP would be reduced by $250,000. However:

despite the designation as an eligible dividend of $250,000 by Opco, Holdco's GRIP would only be increased by $75,000 if subsection 55(2) applies and, because of this application the dividend considered to be received by Holdco is only $75,000, which is the amount of safe income on hand attributable to the Class B preferred shares in the capital of Opco held by Holdco. , Holdco's GRIP would increase by only $75,000 if s. 55(2) applied.

If Opco instead made an eligible dividend designation of $75,000 to correspond with the deemed dividend receipt of Holdco, CRA would consider such $75,000 receipt to be eligible dividends (TaxInterpretations translation):

[T]he dividend(s) considered as received by Holdco in the total amount of $75,000 (representing the safe income on hand) would be one or more eligible dividends, as the case may be. As a result, Holdco's GRIP would increase by $75,000. We would not prorate the eligible dividend between the separate dividends totalling $75,000, and the dividend which was deemed not to be a dividend by virtue of subsection 55(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(14) eligible dividend designation treated as applying only to safe income portion of dividend 261

16 April 2013 External T.I. 2013-0477771E5 F - Calculation of the general rate income pool

GRIP reduction for non-capital loss carried back against full-rate taxable income earned before becoming CCPC

A Canadian-resident corporation (Corporation A), which presents performances of an artist (A) who is its sole shareholder, became a Canadian-controlled private corporation on January 1, 2010 as a result of A becoming resident in Canada. Its increase under s. 89(4) was nil, and variable A of the definition of general rate income pool was nil. Corporation A incurs a non-capital loss in 2010 of $80,000, which is carried back to reduce its full rate taxable income (FRTI), as defined in s. 123.4(1), for 2007 and 2009. It has not paid or received dividends. CRA stated (TaxInterpretations translation) that:

...Corporation A technically is required to reduce its GRIP in order to account for the claiming of its 2010 loss as a deduction from its FRTI for 2007 and 2009 by virtue of variable B of the definition of GRIP in subsection 89(1). Consequently, in the particular situation, the GRIP amount of Corporation A becomes negative by an amount corresponding to variable B in the GRIP definition in subsection 89(1).

28 November 2010 CTF Roundtable Q. 5, 2010-0385991C6 - 2010 CTF - Q. 5 - 55(2) and GRIP

Where a CCPC pays an eligible dividend across a single class of shares owned 50/50 by a Canadian resident individual and a Canadian resident CCPC, both of whom are not related, can the CRA confirm that there is no reduction in the payer CCPC's GRIP in respect of an eligible dividend for the portion of the dividend that s. 55(2) applies to, where the dividend exceeds the safe income attributable to the shares owned by the recipient CCPC? In responding negatively, CRA stated:

[T]he effect of the deeming provision in paragraph 55(2)(a) should be limited to the dividend recipient and should have no bearing on the computation of the GRIP of the payer CCPC.

Income Tax Technical News, No. 41, 23 December 2009

Where the full amount of the dividend paid by a CCPC is designated as an eligible dividend but a portion of the dividend is received by a non-resident, that portion will not meet all of the essential conditions for being an eligible dividend for purposes of the GRIP definition and, therefore, will not reduce the GRIP.

Articles

John Granelli, "Getting a Handle on GRIP", Tax Topics (Wolters Kluwer), No. 2252, May 7, 2015, p. 1

Addition to general rate income pool differs from actual after-tax income subject to full rates (p.1)

[T]he following table compares the GRIP addition to actual after-tax income for $100,000 of full-rate income (not manufacturing and processing profits) earned in three provinces:

Actual after-tax income
GRIP addition High-rate province

(NS)

Medium-rate province

(ON)

Low-rate province

(AB)

$72,000 $69,000 $73,500 $75,000
Feasibility of electing under s. 89(11) not to be a CCPC in order to increase eligible dividends (p.2)

There are many private corporate groups whose taxable capital exceeds $15 million and which, therefore, will never have an annual business limit and will never be able to claim the small business credit. Further, it is a relatively simple matter to isolate the investment income of a corporate group in one or more corporations, so that other corporations in the group earning active business income will never generate LRIP. These groups are likely candidates for considering the election.

…On ceasing to be a CCPC, subsection 89(8) provides that a corporation must calculate what is, in effect, its tax retained earnings. To the extent this exceeds the sum of its GRIP at the end of the prior taxation year and its capital dividend account, the amount is added to its LRIP. Thus, to the extent the corporation has retained surplus that was not taxed at the full rate, the amount becomes LRIP, which, of course, must be distributed as an other-than-eligible dividend before a dividend can be designated as eligible.

Avoidance of LRIP by CCPC (Famco) transferring business to new Opco which will elect (pp.2-3)

[F]amco is a CCPC that carries on and active business….It has accumulated significant investment assets….

After the roll down of the business assets to Opco, the total tax cost of Opco's assets will be equal to the sum of the tax cost of its debts and the paid-up capital of the shares Famco owns. As a result, Opco has no "tax retained earnings" and, on making the election not to be a CCPC, cannot have an LRIP account.

If Opco pays its tax in a province that under-provides GRIP, making the election increases its annual entitlement to designate dividends paid from future earnings as eligible. Reconstituting Famco as a holding company allows the individual shareholders to receive eligible dividends notwithstanding that a portion — perhaps a large portion — of Famco's own surplus attracted either the small business deduction or the refundable portion of Part I tax….

Anti-avoidance rule (p.3)

[I]nherent in the definition of "excessive eligible dividend designation" in subsection 89(1) is an anti-avoidance rule…

The CRA's general view is that a transaction will not be caught under this rule so long as the surplus from which the eligible dividend is paid has been subject to tax at full rates….

Suppose that Mother and Father have decided to put their affairs in order by freezing their equity in Famco, which will issue new common-shares to their children and/or a trust for their children or grandchildren.

  • Opco pays eligible dividends to Famco
  • Famco redeems the freeze shares of Mother and Father, designating the resulting deemed dividend as eligible. Famco recovers RDTOH.

…The result is as follows: cash flow to Mother and Father, no net cash tax cost to the group as a whole, and a reduction of the taxes inherent in the value of their freeze preferred shares, which will be taxed when Mother and Father pass on.

Indeed, in many provinces…Famco's dividend refund exceeds the taxes [of] Mother and Father… .

Attribution (p.4)

There are many other issues to consider in establishing such a structure, including the potential for the application of corporate attribution if Famco is not a small business corporation….

Dividends to non-residents (p.4)

The CRA has confirmed (see Income Tax Technical News No. 41, for example) that, notwithstanding that all of a dividend paid is designated as eligible, a corporation reduces its GRIP only by the portion of the dividend paid to residents of Canada.

Jennifer Smith, Trent Henry, "De-tax the Dividends", CA Magazine, December 2006, p. 40.

Element A

Element G

Administrative Policy

23 December 2008 External T.I. 2008-0271401E5 F - GRIP/CRTG

safe income dividend can be included in GRIP if designated as separate dividend

Bco receives, from its wholly-owned subsidiary (Aco), two taxable dividends (the first, designated as an eligible dividend of $3.5 million, for $1.5 million), both of which are subject to s. 55(2). Bco designates under s. 55(5)(f) the $3.5 million dividend to consist of: a dividend of $3 million (the amount of the safe income on hand attributable to the gain on its shares); and $500,000. Can Bco include the full $3.5 million taxable dividend in computing its GRIP even though it is subject to s. 55(2)?

In finding that Bco could only include $3 million in its GRIP pursuant to para. (a) of Element G of the GRIP formula. CRA stated:

[W]here paragraph 55(2)(a) applies to a taxable dividend received by a corporation, the dividend cannot be included in computing the corporation's GRIP. However, … CRA … accepts that the portion of the dividend that may be considered safe income on hand attributable to the gain on the shares may be included in the GRIP of the corporation receiving the dividend if the corporation … designates such amount as a separate taxable dividend under paragraph 55(5)(f).

Paid-Up Capital

See Also

Insight Venture Associates III, LLC v. SLM Soft Inc. (2003), 67 O.R. (3d) 115 (S.C.J.)

stated capital increase equal to principal of converted debt

With respect to s. 23 of the Ontario Business Corporations Act … the effect of the conversion [of] a debt security into shares releases the corporation from liability for the principal amount of the debt security and that constitutes the consideration for the issuance of the shares.

Administrative Policy

2015 Ruling 2015-0584151R3 - Conversion of Contributed Surplus to PUC

corporate PUC and capital surplus flowed through on a cross-border continuance

A non-resident corporation governed by a non-resident jurisdiction’s corporate law had issued share capital based only on the “nominal value” of its common shares, but with a share premium account from share issuances. It became resident in Canada through a change in its central management and control, and then continued under a provincial companies statute, with the issued share capital account and share premium account being relabelled as stated capital and contributed surplus, respectively, on the continuance. It then passed a resolution converting the newly-styled capital surplus account into further stated capital.

CRA ruled that resolution did not generate a s. 84(1) deemed dividend.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(1) cross-border inbound continuance of corporation with different labels for capital and surplus followed by conversion of capital surplus to stated capital 245

20 March 2015 External T.I. 2014-0535971E5 - Meaning of "paid-up capital" in subsection 90(3)

LLC with partner capital-account style LLC Agreement does not have PUC

CRA stated that "to the extent [the applicable State corporate] laws and constating documents do not provide for stated capital akin to that which is provided for under Canadian domestic corporate law but, rather, provide for an attribute that is akin to a partner's capital account, [a] US LLC would not…have stated capital" – and therefore would have no paid-up capital for s. 90(3) purposes. See summary under s. 90(3).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 90 - Subsection 90(3) LLC with partner capital-account style LLC Agreement does not have PUC 251

8 October 2010 APFF Roundtable, 2010-0373301C6 F - Classes of shares with identical characteristics

identical but separate QBCA classes would have separate PUC

Under s. 49 of the new Québec Business Corporations Act, it is possible to create classes and series of shares with exactly the same rights and restrictions. Those classes or series have their own issued and paid-up share capital accounts by virtue of the QBCA. Would two identical classes of shares created under the QBCA have their own paid-up capital for tax purposes? CRA responded:

To the extent that shares with exactly the same rights and restrictions belong to two distinct classes under corporate law, the paid-up capital of each of those classes will be calculated separately.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 47 - Subsection 47(1) shares of identical but separate QBCA classes are identical properties unless their PUC rights differ 184

October 1992 Central Region Rulings Directorate Tax Seminar, Q. 2 (C.T.O. Doc. No. 142 "Paid-Up Capital Foreign Currency Shares"; May 1993 Access Letter, p. 230)

Because where a transaction is on capital account, the Canadian dollar value of the transaction is calculated at the exchange rate prevailing at the time of the transaction, the paid-up capital of shares maintained in a foreign currency is determined by converting the foreign currency amount to Canadian currency at the exchange rate at the time the shares were issued.

88 C.R. - Q.7

Where the stated capital in respect of a class of shares is maintained in a foreign currency, the paid-up capital in respect of shares of the class is equal to the Canadian dollar equivalent of the consideration for which the shares were issued, computed at exchange rates prevailing at the time the shares were issued.

88 C.R. - Q.35

Where subsequent to a transaction to which s. 85(2.1) applied, a corporation reduced its stated capital for corporate purposes, then the paid-up capital of the shares will be equal to the reduced stated capital minus the s. 85(2.1) adjustment.

IT-463R2 "Paid-up Capital" 8 September 1995

2

Since subparagraph (b)(iii) of the definition of "paid-up capital" provides that the amount of the paid-up capital of a class of shares is initially determined without reference to the provisions of the Income Tax Act, the calculation is based on the relevant corporate law rather than tax law. The amount calculated under corporate law is usually referred to as the "stated capital" of the class of shares. ...

3

In regard to the issuance of shares, the stated capital account reflects

(a) the par value of shares issued with a par value,

(b) the amount ascribed by the directors for shares issued without par value or, in some jurisdictions, the fair market value of the consideration received for shares issued without par value...

Articles

Marshall Haughey, "Issuing Shares for a Promissory Note", 24 Can. Current Tax, May 2014, p. 85.

Prohibition by jurisdiction (pp. 85-6)

[I]n Saskatchewan, Manitoba, New Brunswick, and Newfoundland…a promissory note cannot be given as consideration for the issuance of shares under any circumstances.…

In Alberta, Ontario, and under the CBCA, the restriction only applies to promissory notes issued by the subscriber or a person who does not deal at arm's length with the subscriber… [A] subscriber could pay for shares with a promissory note issued by an arm's length party. …

[I]n British Columbia, , the restriction only applies to "a record evidencing indebtedness of the person to whom shares are to be issued" (i.e., a promissory note issued by the subscriber)….

[N]ova Scotia and Prince Edward Island's corporate legislation contains no restriction… .

Consequences of breach: invalid share issuance (pp. 86-7)

The case law is divided on what results when shares are issued for less than adequate or no consideration. The two streams of cases can be described as the "Nullification Stream" and the "Contextual Stream" .[fn 13: For a more comprehensive discussion of the cases see Greg Johnson, "Recent Developments of Interest to Tax Practitioners", 2005 Prairie Provinces Tax Conference (Toronto: Canadian Tax Foundation, 2005), 18:1-27 at 18:4-8.] The genesis of the "Nullification Stream" can be traced to Professor Bruce Welling's commentary from his textbook Corporate Law in Canada, which was adopted by the Québec Superior Court in Javelin International Ltd. v. Hillier. [fn 15: [1988] Q.J. No. 928 (Qc. Sup. Ct.),,,] In Welling's view, the use of the phrase "shall not be issued" in s. 25(3) of the CBCA (and its provincial equivalents) means that inadequate consideration results in a nullity as between the issuer corporation and the registered holder. This was also the view of the Tax Court in Ball v. MNR [fn 16: …92 D.T.C. 2123…] …. . Nullification was used in the recent Federal Court of Appeal case St Arnaud v. The Queen [St Arnaud]. [fn 18: [2013] F.C.J. No. 338, 2013 FCA 88.]. …[T]he court found that the money paid for shares was either not received by the corporation or received simply as a conduit for the fraudster. The result was that the shares were not validly issued.

Consequences of breach: consequences in court's discretion (p. 87)

The Contextual Stream of cases posits that corporate legislation does not explicitly state what remedy is available when shares are issued without being fully paid for; thus, it is up to the courts to decide on the appropriate remedy. The result can then be nullification, director liability, or permitting the purported shareholder to pay the subscription price to validate the share issue. There are lines of cases out of British Columbia [fn 19: Davidson v. Davidson Manufacturing Co. (1977), [1978] B.C.J. No. 60 (B.C.S.C.); Oakley v. McDougall, [1987] B.C.J. No. 272, 17 B.C.L.R. (2d) 134 (B.C.C.A.); Re Lajoie Lake Holdings Ltd, [1991] B.C.J. No. 137 (B.C.S.C.).] and Ontario, [fn 20: See Dunham and Pollo Tours Ltd. (No. 1), [1978] O.J. No. 3380, 20 O.R. (2d) 3, (Ont. H.C.J.); Gillespie v. Retail Merchants' Assn. of Canada (Ontario) Inc., [1997] O.J. No. 956 (Ont. C.J.).] supporting this view. A more recent Alberta Court of Appeal case also adopts the contextual approach… [fn 21: Pearson Finance Group Ltd. v. Takla Star Resources Ltd., [2002] A.J. No. 422, 2002 ABCA 84, aff'g [2001] A.J. No. 917, 2001 ABQB 588 [Takla].]… .

Validation by curative provision (p. 88)

Interestingly, neither the Nullification Stream nor the Contextual Stream referred to subs. 16(3) of the CBCA or its provincial equivalents. [fn 24: ABCA, s. 17(3); SBCA, s. 16(3); MCA, s. 16(3); OBCA, s. 17(3); NBBCA, s. 14(3); NLCA, s. 29. Subsection 33(2) of the BCBCA is slightly narrower in that it only validates acts that are done contrary to the company's constating documents.] That provision states that "[n]o act of a corporation, including any transfer of property to or by a corporation, is invalid by reason only that the act or transfer is contrary to its articles or this Act". This wording is seemingly dispositive of the issue; yet, this is not entirely clear as ambiguity exists in the wording "by reason only"….

Locations of other summaries Wordcount
Tax Topics - General Concepts - Illegality 664

Vern Krishna, "Equity Financing: Corporate Aspects", 19 Canadian Current Tax, December 2008, p. 21.

Stephen Fyfe, Craig Webster, "Current Mutual Fund Developments and Products", 2000 Conference Report, c. 21: Discussion (at pp. 21:40-42) of paid-up capital of mutual fund corporation including:

A number of years ago, advance income tax rulings were sought from the CCRA with respect to whether a mutual fund corporation has paid-up capital under the Act and, if so, whether that paid-up capital can be reduced for the purposes of making a tax-free distribution to shareholders. The CCRA consulted with the Department of Justice to obtain guidelines on the corporate law issues. The Department of Justice advised the CCRA that it could not conclude in the affirmative on either of these questions, so the ruling request was withdrawn.

[The discussions with CRA apparently were not based on a proposal to amend the articles of the relevant corporation so as to specifically provide for the calculation of paid-up capital. However, in 2006, CRA declined to rule where there was such a proposal.]

Christopher J. Steeves, "Shares Issued for Foreign Currency and the Potential for Deemed Dividends", Corporate Structures and Groups, Vol. V, No. 4, 1999, p. 280: Discussion of the time at which the paid-up capital of a share issued in a foreign currency is translated into Canadian dollars.

Paragraph (a)

Administrative Policy

8 October 2010 Roundtable, 2010-0373221C6 F - Paid-up capital

abusive use of PUC averaging to shift PUC to individuals

CRA indicated that it has concluded in some cases that using PUC averaging to shift PUC to individual shareholders engages GAAR, and “is currently reviewing additional cases that are similar in their results but have some variations.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) - Paragraph 245(3)(a) transaction can be an avoidance transaction even where the series is motivated by business reasons 142
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) CRA has concluded in some cases that using PUC averaging to shift PUC to individual shareholders engages GAAR 283

Private Corporation

Administrative Policy

80 C.R. - Q.25

The status of a private corporation does not change on the acquisition of its control by a public corporation acting as executor or trustee as a result of the death of an individual.

Public Corporation

Administrative Policy

2015 Ruling 2015-0577141R3 - Election to cease to be a public corporation

closely-held Amalco can elect following the delisting of shares of a public predecessor
Proposed transactions

Bidco, which is a wholly-owned Canadian-resident subsidiary of Holdco2, which is a non-resident wholly-owned subsidiary of a non-resident public company (Holdco1), will acquire (pursuant to a plan of arrangement) all the issued and outstanding common shares of Pubco, which is a Canadian-resident public company whose common shares are listed on the Exchange. The applicable rules result in the inability to delist common shares of Pubco from the Exchange until three business days after the Effective Date of the plan of arrangement. Bidco and Pubco will amalgamate, with the share capital of "Amalco" being identical to that of Bidco. Three days after the Effective Date, the shares of Pubco will be so delisted. Amalco will then file an election not to be a public corporation pursuant to s. (c)(i) of the definition of "public corporation" in s. 89(1) whose effective date (as recorded on Form T2067) will be the later of four business days following the Effective Date or soon as practically possible after the receipt of a positive ruling.

Ruling

"Amalco will meet the condition in paragraph 4800(2)(a) of the Regulations and will cease to be a public corporation at the time it files an election, in prescribed manner, not to be a public corporation pursuant to subparagraph (c)(i) of the definition of "public corporation" under subsection 89(1)." The summary states:

Since as a matter of tax policy, a corporation in this situation should not be precluded from electing not to be a public corporation, the condition in Regulation 4800(2)(a) can be read as applying where previously listed shares no longer exist.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(ii) closely-held Amalco can elect following the delisting of shares of a public predecessor 81

27 June 2014 External T.I. 2014-0527341E5 F - Sociétés publiques aux fins de SPCC

Crown corporations not deemed to be public corporations

Are federal Crown corporations not prescribed in Regs. 6700 and 7100 considered public corporations for purposes of the definition of Canadian-controlled private corporation? CRA stated (TaxInterpretations translation):

Certain crown corporations for purposes of the application of particular provisions are deemed to not be private corporations, but such deeming does not have the effect of rendering such corporations public corporations for income tax purposes. Consequently, it is possible that a corporation resident in Canada will be neither private nor public. …[G]enerally a crown corporation which is not prescribed under Reg. 7100 of which the Government of Canada is the sole shareholder cannot satisfy the conditions for being a public corporation.

21 September 2012 External T.I. 2012-0455231E5 - Section 89(1) - defn of a "public corporation"

A wholly-owned subsidiary (Subco) of a public corporation (Pubco) that has never elected to be a public corporation itself, will not itself be a public corporation (although it also will not qualify as a private corporation). Accordingly, on a sale of Subco to a Canadian-resident individual, there is no need for Subco to make the election in para. (c) to not be a public corporation, in order for Subco to qualify in the hands of the purchaser as a Canadian-controlled private corporation.

26 September 1996 External T.I. 9627665 - ELECTION TO CRYSTALIZE GAINS ON GOING PUBLIC

"The Department takes the view that shares that are conditionally listed will not be listed for purposes of the Act until the time at which all of the conditions for the listings have been satisfied. However, the Department is prepared to accept that shares are listed on an exchange if the exchange considers them to have an unqualified listing prior to the date set for the shares to be called for trading."

Forms

T2067 "Election not to be a Public Corporation"

At the time of this election, for each class of shares referred to in 2 above:

a) insiders of the corporation must hold more than 90% of the issued and outstanding shares; and

b) the corporation must have:

  • i) in the case of equity shares, less than 50 shareholders other than insiders;
  • ii) in any other case, less than 100 shareholders other than insiders; and

c) each shareholder (or group of shareholders) other than insiders must hold no less than one block of shares having a fair market value of no less than $500.

T2073 "Election to be a Public Corporation"

Attach a list of shareholders who are insiders and their shareholdings as well as a list of shareholders who are not insiders and indicate the blocks of shares they hold and the fair market value of the shares.

Paragraph (a)

Articles

Joint Committee, "Definition of 'Public Corporation'", 4 March 2019 Joint Committee Submission

shares of Target are considered to be listed up until the completion of the delisting process
  • Acquisitionco, a private company, acquires all the shares of Targetco, a public corporation, and immediately amalgamated with it.
  • 2017-0723771C6 (2017 CTF Roundtable Q. 12) indicates that once the shares of Targetco were delisted, and provided that CRA accepted that the fact that the Targetco shares no longer existed did not preclude the making of an election under (c)(i) (as to which it was prepared to rule on a case-by-case basis), Amalco could make such election on behalf of Targetco, so that Amalco was not deemed to be a public corporation under s. 87(2)(ii).
  • This response was problematic because of the potential need for such a ruling, and passage of perhaps several days before the Targetco shares were delisted.
  • In early 2018, a request was made for a Technical Interpretation that if, shortly before the amalgamation of Targetco with Acquisitionco, Acquisitionco held all the Targetco shares and the Stock Exchange had been notified to delist the shares, the Targetco shares would not be considered to be listed for purposes of paragraph (a) of the definition of public corporation.
  • CRA declined this request, on the basis that it was bound by the words of the Act.
  • Accordingly, it is submitted that the rule in para. (a) of the definition of public corporation – that a listed Canadian corporation is a public corporation - be amended by adding a proviso that this will not be the case where the corporation ceased to be a public corporation under para. (c) because of a valid election or designation.
Words and Phrases
listed
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(ii) Targetco now held 100% by Acquisitionco, and with a formal delisting imminent, is still listed, so that Amalco will be tainted under s. 87(2)(ii) 289

Paragraph (c)

Subparagraph (c)(i)

Administrative Policy

2018 Ruling 2018-0752531R3 - Public corporation election 89(1)(c)(i)

election could be made even though no shares had been listed/qualifed for distribution

Pubco was a corporation that was now closely held but nonetheless was deemed to be a public corporation under s. 87(2)(ii) given that it resulted from the amalgamation of a public corporation and another predecessor. However, at no time since that amalgamation had any class of its shares been listed on a designated stock exchange in Canada (or qualified for distribution to the public). This created a problem for its ability to elect under (c)(i) of the definition of “public corporation” in s. 89(1) to cease to be a public corporation - which was that it did not literally satisfy the requirement in Reg. 4800(2)(a)(i) that “insiders of the corporation shall hold more than 90 per cent of the issued and outstanding shares of each class … that was, at any time after the corporation last became a public corporation, listed on aa designated stock exchange in Canada [or of designated surrogate qualified-for-distribution shares under Reg. 4800(2)(a)(ii)].” The problem of course was that there were no such listed (or qualified) shares of Pubco to which the 90% test could be applied.

CRA however took a “liberal” approach and ruled that the election could be made, so that on the subsequent further amalgamation of Pubco, the resulting Amalco was not tainted as a public corporation under s. 87(2)(ii) (which, in turn, meant that PUC could be distributed to non-resident shareholders of Amalco without withholding tax.)

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 4800 - Subsection 4800(2) - Paragraph 4800(2)(a) Reg. 4800(2)(a)(i) considered to be satisfied when, in fact, none of the shares held by the insiders had ever been listed since the Pubco’s formation by amalgamation 340

21 November 2017 CTF Roundtable Q. 12, 2017-0723771C6 - Election not to be a public corporation

CRA may rule that an election for a listed Target to cease to be a public corporation can be made after Target’s amalgamation

Where a private corporation (Acquisitionco) acquires all of the shares of a publicly-listed target (Targetco), the designated stock exchange often takes several days to formally delist the purchased shares. Prior to such delisting, can Targetco make a valid election not to be a public corporation under s. (c)(i) of the public corporation definition at a time when Acquisitionco owns 100% of Targetco so that, following the amalgamation of Acquisitionco and Targetco, Amalco would not be considered to be a public corporation?

CRA noted that if Targetco meets the prescribed conditions and makes an election before the amalgamation, it will be excluded under (c)(i), but will still be a public corporation under s. (a) while its listing continues.

However, the fact that the shares of a public corporation no longer exist at the time of making an election would not preclude the insider requirement from being met. Accordingly, in those situations where Amalco makes an election after the time that Targetco shares are delisted, Amalco will not be considered to be a public corporation. CRA will continue to rule on a case-by-case basis as to whether the prescribed conditions in (c)(i) of the “public corporation” definition, and in Reg. 4800(2), will be met where shares of a public corporation no longer exist.

Subsection 89(1.2)

Administrative Policy

17 August 2016 Internal T.I. 2016-0639251I7 - Capital Dividend Account and 149(1)(n)

deemed 149(10) gain does not add to CDA before it disapppears under 89(1.2)

CRA indicated that one-half of the capital gains generated by a private corporation that is exempt as a low-rental housing corporation under s. 149(1)(n) are added to its capital dividend account and can be paid out as capital dividends. It went on to indicate:

However, subsection 89(1.2) provides that where a corporation exempt from tax under Part I loses its exempt status its CDA is eliminated.

Subsections 89(1.2) and 149(10) apply, simultaneously and independent of each other, at the time that a corporate entity ceases to be exempt from tax. At this time, subsection 89(1.2) applies to reduce the corporation’s capital dividend account to nil and the deemed disposition under paragraph 149(10)(b) is also triggered. Therefore, any amounts that would have been added to the capital dividend account as a result of the deemed disposition under subsection 149(10) will not be available to the corporation should it wish to elect to pay out a capital dividend to its members.

Subsection 89(7) - GRIP addition for 2006

Administrative Policy

7 January 2008 External T.I. 2007-0227071E5 F - GRIP Addition for 2006

GRIP addition from subsidiary equaling its GRIP given dividends paid by it in excess of that amount

A CCPC (Aco) received (as its only income during the years 2001 to 2005) taxable dividends of $1,200,000 and $300,000 in 2003 and 2005 from its wholly-owned subsidiary (Bco). Bco's "full rate taxable income" ("FRTI") for each of 2003 and 2005 was $634,920, and nil for 2001, 2002 and 2003. As a result, per s. 89(7), for the purpose of calculating the amount of Element A in the formula for computing Opco's general rate income pool addition for 2006 ("GRIP"), $400,000 was added for 2003 and 2004, and nil for the prior years. On the other hand, the amount of Element B in the GRIP Addition for Bco for the years 2001 to 2005 was $1,500,000. Did the $300,000 taxable dividend received by Aco in 2005 increases its GRIP addition? CRA responded:

[T]he amount of Aco's GRIP Addition would be $400,000 since it seems reasonable to us to consider, in this situation, that $400,000 of the dividends Aco received from Bco in its 2003 and 2005 taxation years would be attributable to an amount described in Element A of the GRIP Addition in respect of Bco.

21 March 2013 External T.I. 2013-0476901E5 F - GRIP addition under 89(7)

determination of reasonable attribution of dividend to FRTI of payer corp
Situation 1

Corporation A received a taxable dividend of $1M from its wholly-owned subsidiary (Corporation P) on January 1, 2001, then sold all its shares to Corporation C on January 1, 2002. All three corporations were Canadian-controlled private corporations for the 2001 to 2006 years (the Period). For its 2001 (calendar) taxation year, the full rate taxable income (FRTI) of Corporation P was $1,587,302, and its FRTI was nil for 2002 through 2005. For each of 2002 through 2005, Corporation P paid a $1M taxable dividend to Corporation C.

In response to a query as to whether it was reasonable to consider that the $1M dividend received by Corporation A in 2001 was fully included in para. (c) of element A of s. 89(7), CRA indicated "no" and stated (TaxInterpretations translation):

[I]t would not be reasonable to consider, in the circumstances, that this dividend would be attributable to element A of subsection 89(7) in respect of Corporation P for its taxation year ended on December 31, 2001.

In addition, we are of the view that it may be reasonable to consider, in the circumstances, that a portion of the dividends received by Corporation C during the Period is attributable to element A of subsection 89(7) in relation to Corporation P.

Situation 2

Corporations A and B each held 50% of the shares of Corporation P, and each received a $500,000 dividend from it on January 1, 2001. On January 1, 2002, Corporation A disposed of all of its shares to Corporation B. For its 2001 taxation year, the FRTI of Corporation P was $1,587,302. For its 2002 to 2005 taxation years, Corporation P paid annual dividends of $1M to Corporation B, and it sustained non-capital losses of $250,000 in each of those years.

In response to a query as to whether it was reasonable to consider that the $500,000 dividend received by each of Corporation A and B in 2001 was respectively included under para. (c) of element A of s. 89(7), CRA indicated "no" (for Corporation A) and potentially "yes" (for Corporation B), stating (TaxInterpretations translation):

[Re] the $500,000 dividend received by Corporation A on January 1, 2001 ... it would not be reasonable to consider ..., that this dividend is attributable to element A of subsection 89(7) in respect of Corporation P for its taxation year ending on December 31, 2001.

On the other hand, we are of the view that it could be reasonable to consider, in the circumstances, that a part of the dividends received by Corporation B in the Period was attributable to element A of subsection 89(7) respecting Corporation P.

Situation 3

On January 1, 2001, Corporation P paid a $1M dividend to its shareholders: Corporations A, B and C holding 40%, 20% and 20% of its shares. On January 1, 2002, Corporation C sold half of its shares to Corporation A, and sold the other half to Corporation N, so that Corporations A, B and N held 60%, 20% and 20% of the shares. The FRTI of Corporation P was nil for the 2001, 2002 and 2003 taxation years, and $1,587,302 for each of 2004 and 2005. In 2002, 2003 and 2004, Corporation P paid a dividend of $1M. CRA stated (TaxInterpretations translation):

[Re] the $400,000 dividend received by Corporation C on January 1, 2001 ... it would not be reasonable to consider ... that this dividend is attributable to element A of subsection 89(7) in respect of Corporation P for its taxation year ending on December 2001.

... [T]he amount of element A of subsection 89(7) respecting Corporation P must be apportioned reasonably, in accordance with the facts and circumstances, between Corporation A, Corporation B and Corporation N in order to determine the amount which should be included in paragraph (c) of element A of subsection 89(7) for each of Corporation A, Corporation B and Corporation C.

24 January 2011 Internal T.I. 2010-0390111I7 F - GRIP Computation and Taxable Income for M&P Credit

income for M&P purposes not taken into account for purposes of the calculation

Corporation C realized a business loss in 2006, which was carried back to 2003. Should Corporation C’s income for purposes of the M&P credit under s. 125.1(1) in 2003 (the “MPPD Amount”) be taken into account in computing its GRIP addition for 2006 ("GRIPA 2006") related to 2003? The Directorate stated:

The calculation of the GRIP addition in respect of the MPPD is described in Part 2 of Schedule 53 "General Rate Income Pool (GRIP) Calculation" in accordance with the definition of GRIP and does not take into account the amount of income of a corporation subject to MPPD (the "MPPD Amount") for a particular taxation year, regardless of whether that amount may have been taken into account in the calculation of the GRIPA 2006. …

It is clear to us, having regard to the provisions of elements I and J of element B of the formula in the definition of GRIP, that the MPPD Amount for a taxation year is not taken into account for purposes of the calculations.

26 May 2008 External T.I. 2007-0263001E5 F - 2006 GRIP Addition

illustration of circular calculations for GRIP additions where cross-redemption in 2004
3rd Situation

ABCco and DEFco are connected CCPCs with calendar year ends. During each of 2001 to 2005, ABCco had full rate taxable income ("FRTI") of $160,000. The total of the amounts referred to in paras. (a) and (b) of A in the GTIP addition formula for 2001 to 2005 for ABCco was $504,000.

In 2002, each of ABCco and DEFco received a taxable dividend of $800,000 from the other on a cross share redemption. Such receipt of DEFco was its only income for its 2001 to 2005 years, and no other dividends were paid them during this period.

In finding that the GRIP addition for 2006 for ABCco and DEFco would be $504,000 and $0, respectively, CRA noted that “the amount referred to in paragraph (c) of Element A of the formula for calculating the GRIP addition for 2006 of each of the connected corporations can be determined by successive calculations,” and then stated:.

Thus, in the third situation, the amount of $504,000 of the GRIP addition for 2006 for ABCco would ultimately correspond, at the end of the successive calculations, to the excess of the total of the amounts referred to in element A of the formula for calculating the GRIP addition for 2006 for the period 2001 to 2005, being $1,034,000 (that is, the total of the amounts referred to in paragraphs (a) and (b) of the description of A of that formula, i.e., $504,000, and the total of the amounts referred to in paragraph (c) of the description of A of that formula, being $800,000) out of the total of the amounts referred to in the description of B of the formula for calculating the GRIP, being $800,000. Furthermore, in the third situation, the GRIP addition for 2006 for DEFco would be nil at the end of the successive calculations.

The result is the same whether the circular calculations begins with the $800,000 dividend paid by one of the corporations, or the other … .

4th Situation

This is identical to the 3rd, except that, in 2004, ABCco paid a taxable dividend of $100,000 to its parent. In finding that, here, the 2006 GRIP addition for 2006 for ABCco and DEFco would be $404,000 and $0, respectively, and that, the parent could add $100,000 in computing para. (c) of variable A of the formula, for its 2004 taxation year, CRA stated:

[S]ince DEFco received from ABCco, during the period 2001 to 2005, a portion ($800,000) of the total taxable dividends paid by ABCco ($900,000), the portion of the dividend received by DEFco that can reasonably be considered to be attributable to an amount described in paragraph (a), (b) or (c) of the description of A in respect of ABCco should be prorated based on the taxable dividends received by DEFco out of the total taxable dividends paid by ABCco.

20 February 2008 External T.I. 2007-0250841E5 F - GRIP addition for 2006

dividend can be paid before the income is earned

Holdco 2 wholly-owns Opco 2. A(a) and (b) of s. 89(7) for Opco 2 are nil for the taxation year ending in 2001, while they aggregate $100,000 for each of the taxation years ending in 2002 to 2005, inclusive. The only dividend paid by Opco 2 in its 2001 to 2005 taxation years was a $400,000 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.

CRA indicated that in determining the amount to be included in the GRIP addition for 2006 of the recipient corporation (Holdco 2) in respect of a dividend received during a taxation year ended after 2000 and before 2006 (the $400,000 dividend paid in 2001), one may consider the total amounts of full rate taxable income of the payer corporation (Opco 2) for its 2001 to 2005 taxation years.

7 January 2008 External T.I. 2007-0225481E5 F - GRIP Addition for 2006

GRIP addition from subsidiary resulting from 2001 and 2005 dividends

A CCPC (Holdco) received (as its only income during the years 2001 to 2005) a taxable dividend of $400,000 in 2001 from its wholly-owned subsidiary (Opco). Opco's "full rate taxable income" ("FRTI") for each of the years 2001 and 2005 was $198,412 and $952,380, respectively; and nil doe 2002, 2003 and 2004. As a result, per s. 89(7), for the purpose of calculating the amount of Element A in the formula for computing Opco's general rate income pool addition for 2006 ("GRIP"), $125,000 was added for 2001 and $600,000 for 2005. In addition, the amount of Element B of Opco's GRIP formula was $400,000.and Subco's Element A of the formula for computing the GRIP Addition for 2006 pursuant to s.89(7) for 2002 to 2004 was nil and for the years 2001 and 2005 was $125,000 and $600,000, respectively. What was Holdco’s and Opco’s GRIP Addition for 2006? CRA responded:

[T]he amount of the GRIP for Opco is $325,000, that is, the amount of Element A (i.e., $725,000) minus the amount of Element B (i.e., $400,000) of the formula in subsection 89(7).

Furthermore … the amount of Holdco's GRIP is $400,000, since it seems reasonable to us to consider, in this situation, that the $400,000 dividend that Holdco received from Opco during 2001 is attributable to an amount described in Element A of the GRIP formula in respect of Opco.

Element A

Administrative Policy

19 December 2012 External T.I. 2012-0468511E5 F - GRIP addition for 2006

no adjustment made for dividend received from connected CCPC sold over 4 years before 2006

Corporation A, which held 40% of the shares of Corporation B (also a Canadian-controlled private corporation), received a (s. 112(1) deductible) dividend of $4,000,000 from Corporation B on January 10, 2001. This dividend was deductible under subsection 112(1) in computing the taxable income of Corporation A. On January 26, 2001, all of the shares of were sold to a U.S. corporation. For the short taxation year ending on January 25, 2001, the "full rate taxable income" (per s. 123.4 (1)) of Corporation B was nil. Corporation A did not have access to Corporation B's tax information after such disposition. 2007-0250841E5 (the "Position") could apply in the particular situation.

If the position in 2007-0250841E5 applies to include an amount by virtue of para. (c) of Element A of s. 89(7) for purposes of calculating the gross-up of the general rate income pool ("GRIP") for Corporation A, how does it obtain the necessary Corporation B tax information? CRA responded:

[I]t is unreasonable to consider, given the circumstances (including the disposition by Corporation A of all the shares of the capital stock of Corporation B that it held at the time where the "full rate taxable income" of Corporation B was nil), that the dividend of $4,000,000 was attributable to an amount referred to in paragraphs (a), (b) or (c) of Element A in subsection 89(7) in respect of Corporation B.

Paragraph (c)

Administrative Policy

8 December 2008 External T.I. 2008-0264691E5 F - GRIP Addition/ Majoration CRTG

dividends of full rate taxable income from sub to parent generated addition to parent’s GRIP addition

Subco earned $160,000 of full rate taxable income in each of the 2001 to 2005 years and paid to its wholly-owning parent (Parentco) in each of those years a taxable dividend of $110,000, In confirming that Parentco's and Subco's GRIP addition, pursuant to subsection 89(7), would be $504 000 and $0, respectively, CRA indicated in its summary that:

It would be reasonable to consider that $504 000 of the total dividends of $550 000 that Parentco received from Subco during the relevant period was attributable to an amount described in variable A of the formula in respect of Subco's GRIP Addition under subsection 89(7).

Subsection 89(8) - LRIP addition — ceasing to be CCPC

Administrative Policy

19 January 2011 External T.I. 2010-0390831E5 - Compute LRIP - corporation becomes non-CCPC

A future income tax asset is not "property" within the meaning of variable A of s. 89(8) as it does not represent a "right" - unless the corporation has a right to receive a refund of the tax. Likewise, future income tax liabilities are not included in variable D if the corporation has no obligation to pay such amounts.

28 August 2009 External T.I. 2009-0325881E5 F - Application of Subsection 89(8)

no deduction under element C for loss of target incurred in the year after the change of control

A public corporation (“Pubco”) acquires all shares of "Target" (theretofore, a Canadian-controlled private corporation with a calendar year end) on January 1, 2006, with no s. 256(9) election being made. Is there a low rate income pool ("LRIP") addition under s. 89(8)? The correspondent stated that “no amount could be determined for Target in respect of element I in the formula provided for in element H of subsection 89(8) since the definition of general rate income pool ("GRIP") is not applicable for the 2005 taxation year” suggested that there appeared to be an overstatement (from a policy perspective) of Target's LRIP “resulting from its inability to benefit from the GRIP balance that it would have otherwise enjoyed had its change in status occurred after January 1, 2006.” CRA responded:

[S]ubsection 89(8) is technically applicable … .

[R]esponsibility for tax policy … rests with the Department of Finance … .”

The second situation is the same except that the acquisition of control of Target occurs on January 1, 2008. The application of s. 89(8), without taking into consideration variable C, would result in a particular LRIP addition for Target. However, Target would also sustain a non-capital loss in its 2008 taxation year, which would not be carried back to prior taxation years. CRA stated:

[O]nly the amount of losses incurred by a particular corporation before the loss of its CCPC status that would be deductible and not yet deducted under subsection 111(1) in computing its taxable income for its taxation year before the change in status would be included in element C in subsection 89(8).

Thus, there would be no deduction under C for the 2008 loss.

Subsection 89(11) - Election: non-CCPC

Administrative Policy

May 2013 ICAA Roundtable, Q. 24 (reported in April 2014 Member Advisory)

no SRTC effect

[A] subsection 89(11) election does not prevent an otherwise qualifying CCPC from receiving the enhanced federal SR&ED rate of 35%. The election is limited to the provisions identified in paragraph (d) of the definition of CCPC.

20 October 2010 External T.I. 2010-0377251E5 F - Canadian Controlled Private Corporation

s. 89(11) election required to be made before target elected to cease to be a public corp so as to oust s. 249(3.1)

On May 15, 20-A, Corporation A, a Canadian-controlled private corporation (a "CCPC"), acquired all the shares of Corporation B, a public corporation. Corporation B thereby had a deemed taxation year end of May 14, 20-A, and adopted May 14, 20-B as its next year end. Pursuant to s. (c)(i) of "public corporation," s. 89(1), Corporation B elected to no longer be a public corporation from June 1, 20-A onwards, thereby becoming a CCPC which, in turn, resulted in a deemed taxation year end on May 31, 20-A by virtue of s. 249(3.1).

However, Corporation B elected pursuant to s 89(11) on November 14, 20-B for its taxation year beginning on May 15, 20-A to not be a CCPC. Does this mean that Corporation B never became a CCPC, and did not have a deemed taxation year end on May 31, 20-A by virtue of s. 249(3.1)?

After noting that in the absence of an s. 89(11) election, Corporation B became a CCPC on June 1, 20-A, CRA stated:

[As] Corporation B did not make an election under subsection 89(11) to not be a CCPC until November 14, 20-B … the exception in paragraph (d) of the definition of CCPC in subsection 125(7) could only apply to Corporation B for the taxation year beginning on June 1, 20-A and ending on May 14, 20-B, and thereafter.

..[I]f Corporation B had made the election under subsection 89(11) at any time during the period beginning on May 15 and ending on November 30, 20-A, rather than on November 14, 20-B, subsection 249(3.1) would not apply to cause a deemed taxation year end on May 31, 20-A, because of the application of the exception in paragraph (d) of the definition of CCPC in subsection 125(7) during that period.

Articles

Manon Thivierge, "Income Tax Due-Diligence Considerations in Mergers and Acquisitions", 2015 Conference Report (Canadian Tax Foundation), 18:1-29

Deemed year-end on ceasing to be a CCPC (p. 18:16)

[U]nder subsection 249(3.1), when a corporation either becomes or ceases to be a CCPC (otherwise than by way of an acquisition of control to which subsection 249(4) applies), it is deemed to have a taxation year-end immediately before the time that it becomes or ceases to be a CCPC. As a result, an M & A transaction may cause multiple year-ends for a target that is a CCPC.

Example of multiple year-ends when non-resident agrees to acquire then acquires CCPC (p. 18:17)

On September 1, 2015, a non-resident acquires the right to buy the shares of the capital stock of the target pursuant to a share purchase agreement, subject to certain conditions (such as obtaining prior regulatory approval or consents from third parties). The closing of the sale of the target's shares takes place on December 1, 2015. …

[T]he target will have a fiscal year-end on August 31, 2015. Because the non-resident will have a contingent right to acquire the shares of the target…[this] will result in [target] ceasing to be a CCPC; this change of status from CCPC to non-CCPC will cause a deemed taxation year-end. …[T]he target will then have a second deemed year-end immediately before the sale of its shares [under s. 249(4)]. Finally, if the target wishes to keep December 31 as its year-end for commercial purposes, it will have a third year-end….

Potential s. 89(11) election (p. 18:18-19)

[T]he target will lose the benefits associated with its CCPC status for the period from September 1 to November 30, whether or not the transaction takes place. For example, if regulatory approval of the acquisition is not obtained, the target will become a CCPC again only when the non-resident no longer has the right to purchase its shares under the share purchase agreement. …

A possible solution is for the target to elect not to be considered to be a CCPC under subsection 89(11). … [T]he election applies only for the purposes described in paragraph (d) of the definition of CCPC in subsection 125(7) —namely, the small business deduction and provisions relating to the GRIP and the LRIP—as well as subsection 249(3.1). For all other purposes, the target will continue to be a CCPC prior to the closing of the acquisition. Consequently, an election under subsection 89(11) will not have any impact on the target's ability to claim the manufacturing and processing profits deduction under paragraph 125.1(1)(a) or the enhanced ITC for SR & ED. Similarly, shareholders of the target will continue to be able to claim an allowable business investment loss or the capital gains deduction for qualified small business corporation shares on the sale of the shares of the capital stock of the target, as the case may be.

Subsection 89(14) - Dividend designation

Administrative Policy

7 October 2020 APFF Roundtable Q. 11, 2020-0852231C6 F - Designation under subsection 89(14)

dividend designation cannot state it is the GRIP, if less

At 2017-0709021C6 F, CRA accepted that the amount of the dividend paid out of the capital dividend account on a winding-up need not be specifically stated in the applicable resolution. CRA effectively indicated that this accommodation was sui generis, and that it would not allow an eligible dividend designation to state that it was in an amount equaling the lesser of the dividend amount and the general rate income pool ("GRIP") balance at the end of the corporation's taxation year.

The solution to making a designation in a specific dollar amount that was too high was to elect on the excessive dividend amount under s. 185.1(2) to convert it to a non-eligible dividend, so as to avoid the Part III.1 tax. CRA also noted that, administratively, it:

[a]llows … mitigating the effects of an excessive eligible dividend designation by accepting that the election provided for in subsection 185.1(2) can be made by a corporation at the time of filing its income tax return, without having to wait for a notice of assessment of Part III.1 tax to be issued.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 185.1 - Subsection 185.1(2) an eligible dividend designation must state a dollar amount, and GRIP variances are addressable under s. 185.1(2) 246

3 December 2019 CTF Roundtable Q. 16, 2019-0824471C6 - Eligible Dividend Designation

where all shareholders of a private corporation are directors, an eligible dividend designation can be done through the dividend declaration

CRA considers that a public corporation can make an eligible dividend designation by posting a statement on its website that “all dividends are eligible dividends unless indicated otherwise,” or by providing a notice in an annual or quarterly report. Similarly, can a Canadian controlled private corporation meet this requirement by providing its shareholders with a written notice in advance that all dividends are eligible dividends unless otherwise indicated? After responding negatively, CRA stated:

... 2009-0347491C6 … provided examples of acceptable notifications of the payment of an eligible dividend from a corporation other than a public corporation to the dividend recipient. Examples of notification included identifying eligible dividends through letters to shareholders and dividend cheque stubs, or where all of the shareholders are Directors of a corporation, a notation in the Minutes.

With respect to a notification by way of notation in the Minutes, we have allowed corporations, other than public corporations, to notify their shareholders of an eligible dividend designation in this manner, where all of the shareholders are the directors of the corporation. Our position is based on the fact that, for practical purposes, non-public corporations will generally have fewer shareholders than public corporations, and such shareholders may often have a seat on the corporation’s Board of Directors in order to take part in the internal management of the corporation. Thus, where all of the shareholders are also directors of the corporation, we consider that a directors’ resolution declaring a dividend and containing a designation that such dividend is an eligible dividend constitutes valid notification in writing for the purposes of subsection 89(14).

18 December 2017 External T.I. 2017-0720731E5 F - Eligible dividend designation

designations can be made before the dividend payment time and by email

CRA stated:

[T]he sending of an e-mail, with an acknowledgment of receipt, would meet the conditions for the designation of a dividend as an eligible dividend pursuant to subsection 89(14).

As to when the written notice must be sent and dated, the CRA accepts that notification in writing should be given to shareholders between the time the dividend is declared and the date the dividend is paid.

Words and Phrases
at that time in writing

20 November 2015 External T.I. 2014-0539951E5 - Foreign Currency Denominated Dividends

U.S.-dollar dividends translated at spot rate on payment date

Citing Banner Pharmacaps, CRA considered that a dividend does not “arise” for s. 261(2) purposes until it is paid (rather than declared) so that its amount, including for eligible dividend designation purposes, is translated using the spot rate on the payment date.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) U.S.-dollar dividends are translated on a cash rather than accrual basis 279

20 February 2014 External T.I. 2013-0480051E5 F - Eligible dividend and safe income

eligible dividend designation treated as applying only to safe income portion of dividend

Holdco, which is unrelated to Opco or any other shareholder, holds 30% of both the Class A common and Class B preferred shares of Opco. Its Class B preferred shares have a redemption amount of $600,00, an adjusted cost base of $180,000, a nominal paid-up capital and attributable safe income on hand of $75,000. Opco's GRIP is $250,000. Opco redeems Holdco's Class B preferred shares for $600,000 and makes s. 55(5)(f) designations so that there are deemed to be separate dividends totalling $75,000. Opco redeems Holdco's Class B preferred shares for $600,000 and makes s. 55(5)(f) designations so that there are deemed to be separate dividends totalling $75,000.

If Opco designates $250,000 of the deemed dividends as an eligible dividend, its GRIP would be reduced by $250,000. However, Holdco's GRIP would increase by only $75,000 if s. 55(2) applied.

If Opco instead made an eligible dividend designation of $75,000 to correspond with the deemed dividend receipt of Holdco, CRA would consider such $75,000 receipt to be eligible dividends (TaxInterpretations translation):

In a situation where subsection 55(2) applies and where, because of this application, the dividend considered to be received by Holdco would amount to only $75,000, we would take the position that the dividend(s) considered as received by Holdco in the total amount of $75,000 (representing the safe income on hand) would be one or more eligible dividends, as the case may be. As a result, Holdco's GRIP would increase by $75,000. We would not prorate the eligible dividend between the separate dividends totalling $75,000, and the dividend which was deemed not to be a dividend by virtue of subsection 55(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - General Rate Income Pool full amount of designated dividend reduces payor's GRIP even though recipient's GRIP increased only by safe income portion 272

6 January 2014 External T.I. 2013-0512041E5 F - Dividend Designation under subsection 89(14)

designation can be on all (rather than just part) of the dividend

After noting that an alleviatory amendment was made to s. 89(14) effective for dividends paid after March 28, 2012 to address the problem that until then it was not possible to designate part of a dividend as an eligible dividend, CRA concluded that a corporation can designate the total amount of a dividend it pays to be an eligible dividend.

Words and Phrases
portion

5 October 2012 APFF Roundtable, 2012-0454091C6 F - GRIP and deemed dividend pursuant to 84.1(1)(b)

s. 84.1 deemed dividend paid to an individual could be an eligible dividend notwithstanding him not being a shareholder of the payer

Mr and Mrs X hold all the shares of Corporation A and B, respectively (both private corporations). Mr X sells all his shares of Corporation A to Corporation B in consideration for a promissory note, resulting in his receipt of a deemed dividend under s. 84.1(1)(b) that is less than the GRIP of B. In finding that this dividend can be designated under s. 89(14) as an eligible dividend (so that the dividend will come out of the GRIP) notwithstanding that Mr X does not hold any shares of B, CRA stated:

The definition of "eligible dividend" in subsection 89(1) and subsection 89(14) does not refer to dividends paid (or received, as the case may be) "to shareholders of any class of shares of its capital stock", such as subsection 83(2) nor dividends paid on "shares of its capital stock", as provided in subsection 129(1).

Consequently, according to the wording of subsection 89(14) and of the definition of "eligible dividend" in subsection 89(1), it is not essential that Mr. X hold any shares of any class of the capital stock of Corporation B nor that the dividends be paid on shares of the capital stock of Corporation B for the purpose of the designation under subsection 89(14).

Furthermore, the dividend deemed to have been paid by Corporation B and received by Mr. X pursuant to paragraph 84.1(1)(b) (and for the purposes of the Act) is a dividend received by a person resident in Canada and a dividend paid after 2005 by a corporation resident in Canada.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) - Paragraph 84.1(1)(b) unnecessary in s. 89(14) for s. 84.1 to have deemed dividend to be paid on shares 227

8 October 2010 APFF Roundtable Q. 11, 2010-0373281C6 F - Redemption of shares and eligible dividend

specific dollar amount required for regular dividends, but not for deemed dividend

CRA's position that, in order to be valid, an eligible dividend designation must stipulate the amount of the dividend, only applies to regular dividends, and not to deemed dividends arising under s. 84(3), whose amount is determined under a formula. The designation should refer to the number and class of shares being redeemed. In particular, CRA stated:

[I]n the case of a share redemption, it would be sufficient, in order for the designation under subsection 89(14) to be valid, to identify the number and class of shares redeemed and to indicate that the designation is in respect of the dividend deemed to have been paid on that specific share redemption, as calculated under subsection 84(3), as long as the other conditions set out in subsection 89(14) are satisfied. In such a case, the CRA would not require that a fixed amount be indicated in order to designate the dividend as an eligible dividend.

If the designation had been made in that manner, correcting the elements in the calculation of the deemed dividend paid under subsection 84(3) would not result in there being a change in there being a designation. That would not constitute a designation of a partial dividend or a late-filed designation. If the amount of the dividend, as recalculated, did not exceed the GRIP, there would not be an excessive eligible dividend designation. However, in the reverse case, there would be an excessive eligible dividend designation.

If the designation had been made by reference to a precise figure as an eligible dividend without any reference to a redemption of shares or a deemed dividend paid under subsection 84(3), the designation could be considered invalid because it was for a partial dividend. However, if the CRA were to find that the designation could only have been in respect of the deemed dividend paid on that share redemption, the CRA would generally take the position that the designation would be valid in respect of the full amount of the deemed dividend paid.

9 April 2010 External T.I. 2010-0361381E5 F - Eligible Dividend

dividends declared separately can be separate dividends notwithstanding their payment by one cheque

The "general rate income pool" of Opco (a Canadian-controlled private corporation) at the end of its 2009 taxation year was $100,000 (and exceeded this amount at the end of 2010). On a day in its 2010 taxation year, Opco declared (pursuant to two separate written resolutions) two separate taxable dividends on its shares: Dividend A for $100,000; and Dividend B for $50,000.). The two dividends were paid before year end with one cheque. Opco designated Dividend A as an eligible dividend. CRA stated:

[T]o the extent that Dividend A was a dividend legally distinct from Dividend B and to the extent that Dividend A was designated as an eligible dividend under subsection 89(14), the fact that only one cheque is issued by Opco in respect of the payment of both Dividend A and Dividend B would not prevent Dividend A from qualifying as an "eligible dividend" … .

21 January 2008 External T.I. 2007-0227531E5 F - GRIP / GRIP Addition for 2006

for 2006 only, CRA accepted designating a portion of a dividend as an eligible dividend

Where, in 2006, Bco's GRIP is $1.3 M and, pursuant to s. 84(3), Bco is deemed to have paid a dividend of approximately $1M to Cco and Dco (approximately $500,000 each), can Bco designate a fraction of the deemed dividend representing Bco's safe income on hand attributable to the purchased shares (approximately $700,000) as an eligible dividend, pursuant to s. 89(14)? CRA stated that:

[T]he CRA accepts, on an exceptional basis for 2006, that a corporation may designate as an "eligible dividend" pursuant to subsection 89(14) a fraction of a dividend where the dividend is declared on a class of shares of the capital stock of the corporation and paid to the holders of the shares of that class during 2006.

Public Corporations

For ... public corporations, ... notification has been made if, before or at the time the dividends are paid, a designation is made stating that all dividends are eligible dividends unless indicated otherwise. Acceptable methods of making a designation are posting a notice on the corporation's website, and in corporate quarterly or annual reports or shareholder publications. ...[A] notice posted on a corporate website is notification that an eligible dividend is paid to shareholders until the notice is removed. Similarly, a notice in an annual or quarterly report that an eligible dividend has been paid is considered valid for that year or quarter, respectively. Alternatively, if a public corporation issues a press release announcing the declaration of a dividend, a statement in the press release indicating that the dividend is an eligible dividend will be sufficient proof that notification was given to each shareholder.

All Other Corporations

For 2007 and subsequent taxation years, for all corporations other than public corporations, the notification requirements of proposed subsection 89(14) must be met each time a dividend is paid. Examples of notification could include identifying eligible dividends through letters to shareholders and dividend cheque stubs, or where all shareholders are Directors of a corporation, a notation in the Minutes.

2 May 2008 External T.I. 2007-0249941E5 - Dividend designation

An eligible dividend designation by a CCPC must specify an amount.

Articles

Hiren Shah, Manu Kakka, "Coming to Grips with Quebec's Lack of GRIP", Tax for the Owner-Manager, Vol. 17, No. 2, April 2017, p.6

Quebec CCPC not eligible for Quebec SBD nonetheless pays ineligible dividends (p. 7)

[C]onsider, for example, a Quebec-resident CCPC that has taxable income of $500,000. The CCPC is not in the primary or manufacturing sector, and it does not have employees with 5,500 hours; therefore, it cannot claim the QSBD. However, it is eligible to claim the federal SBD. Any dividends paid by the corporation will be considered ineligible dividends for federal and Quebec purposes because they are not paid out of the general rate income pool (GRIP), which is only federally defined. Thus, an SBD is available for federal purposes but not for Quebec purposes.

This eliminates advantage of federal SBD on fully-distributed basis (p.7)

It appears as though Quebec is reducing the effectiveness of the federal SBD: the difference between qualifying and not qualifying for the QSBD is a little over 2 percent....A similar tax rate on a fully distributed basis is in effect when no QSBD is claimed versus no SBD at either taxation level…

Subsection 89(14.1) - Late designation

Administrative Policy

12 March 2015 External T.I. 2014-0541991E5 - Objection – Eligible Dividend Designation

designation conditional on appeal result: not acceptable

A Canadian-controlled private corporation ("Canco") declared and paid out a dividend at a time it had an insufficient GRIP balance to make an eligible dividend designation. Subsequently it was reassessed to deny its small business deduction with such assessment being upheld, following appeal, more than three years after the dividend payment date, so that its GRIP balance for that particular taxation year increased. Would CRA be willing to accept (similarly to 2013-0504951E5) an eligible dividend designation conditional on an unsuccessful appeal?

After noting that even for dividends paid after 29 March 2012 (the effective date for s. 89(14.1)) it will not accept late designations that do not satisfy the s. 89(14.1) criteria (re three-year deadline and just and equitable grounds) CRA stated:

CRA cannot accept and hold in abeyance an eligible dividend designation made within the time period set out in subsection 89(14.1) when Canco is assessed by the CRA which will only be effective if a taxpayer has the required GRIP balance at the end of the appeals process.

11 October 2013 APFF Roundtable, 2013-0495771C6 F - Late eligible dividend designation

late designation generally available where CRA, contrary to grounded expectations, denied small business deduction status thereby retroatively creating GRIP/late designation cannot be used to delay GRIP computation
Q.14(a)(1)

Essentially the same question and response as immediately below for 2013-0475261E5 respecting an excessive capital dividend, so that the late designation is available respecting a separate deemed dividend paid by virtue of a s. 184(3) election made because of an excessive capital dividend paid out of the capital dividend account where the GRIP balance is sufficient, the CDA was calculated with care, there was no "apecific intetnion" at the pyament time to apply for a late designation, there has not been a series of late designation requests and the request is not made in the context of abuisive tax planning.

Q.14(a)(2)

As a result of a corporation being found on audit to have been carrying on a personal services business, it retroactively acquires a GRIP balance. CRA indicated that a late designation for dividends already paid generally would be accepted provide the following conditions were satisfied:

  • the general rate income pool of the corporation is sufficient so as not to result in an excessive eligible dividend designation;
  • the request for late designation is not made in the context of abusive tax planning;
  • The corporation had reviewed the SBD rules and the personal services business definition with care before completing its returns, and the corporation had substantial ("serieux") arguments for considering that it was entitled to the SBD;
  • The corporation or its representatives were not simply recless in applying the provisions of the Act regarding the SBD rules. The late designation request did not involve aggressive tax planning.
Q.14(b)

In complying with a request for an example of what CRA meant by making late designation requests deliberately or on a regular basis, CRA referred to the stituation where(TaxInterpretations translation):

a corporation which pays annual dividends in cash (or through a reduction in the amount owing to its shareholder) but does not make a designation under subsection 89(14) at the time of payment of the dividend because it is not in a position to determine the amount of the general rate income pool at that time.

2 August 2013 External T.I. 2013-0475261E5 - Eligible Dividend - Late Filing 89(14.1) & 184(3)

A Canadian-controlled private corporation makes a s. 184(3) election to deem the excess portion of a capital dividend to be a separate taxable dividend. At the dividend payment time, it had a sufficient general rate income pool (GRIP) balance for making an eligible dividend designation. CRA indicated that it would accept a late designation request made within three years, to the extent of a GRIP balance to support an eligible dividend designation, provided the following conditions are met:

* The taxpayers took reasonable steps and care to comply with the requirements in respect of subsection 83(2) and the computation of the capital dividend account at the time that the capital dividend election was originally made;

* The late designation request under subsection 89(14.1) was not specifically intended by the taxpayers at the time that the subsection 83(2) election was made nor does the late designation request form part of a series of requests made on a regular basis; and,

* The late designation request does not involve aggressive tax planning.

29 May 2012 CTF Prairie Tax Conference 2012 Roundtable, 2012-0445661C6 - Late Eligible Dividend Designation

The Minister will generally accept a late designation where, for example:

  1. there have been tax consequences not intended by the taxpayers and there is evidence that the taxpayers took reasonable steps to comply with the law;
  2. the request for late designation arises from circumstances that were beyond the taxpayers' control; or
  3. the taxpayers can demonstrate that they were not aware of the election provision, but took a reasonable amount of care to comply with the law and took remedial action as quickly as possible.

A late designation will not be permitted for retroactive tax planning purposes, nor will a taxpayer be permitted to make late designations deliberately or on a regular basis. For example, relief could be given:

...in a situation where a public corporation receives dividends from its subsidiaries and the subsidiaries do not designate the dividends paid pursuant to subsection 89(14). The absence of timely designations would result in the creation of low rate income pool ("LRIP") balance at the public corporation's level, even though all of the income generated within the corporate group has been taxed at a rate not less than that which applies to full rate taxable income.