Section 89

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 35

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 148

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 159

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) 122

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) 74

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.

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

CDA deduction of extinguished capital losses

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

...we are of the opinion that the fact that the net capital losses of Gesco are not deductible in the calculation of its taxable income for a taxation year ending after the acquisition of control, by virtue of paragraph 111(4)(a), has no effect on the calculation of the CDA of Gesco.

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.

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

A deemed capital gain arising under s. 80(12) will result in an addition to the corporation's 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. 2004-009046 -

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. 2003-003859 -

"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 -

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. 2000-004941 -

"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. 5-972999 -

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 T.I. 941567 (C.T.O. "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 T.I. 940235 (HAA 7313-3) (C.T.O. "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.

28 October 1993 External T.I. 5-932377 -

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 T.I. 932127 (C.T.O. "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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 70 - Subsection 70(5.3) 48

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)

Administrative Policy

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 163

S3-F2-C1 - Capital Dividends

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) 155
Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(n) can have a CDA while exempt 85

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 91

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

s. 55(2)(c) deemed gain is available only in following year

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.

Subparagraph (a)(i)

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 81

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 194

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.

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 174

Paragraph (d)

Administrative Policy

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 150

S3-F2-C1 - Capital Dividends

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.

Subparagraph (d)(ii)

Administrative Policy

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.

Subparagraph (d)(iii)

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 2 123

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 251

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 Annual Conference 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.

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 229

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 239

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

If classes of shares with identical characteristics are created under the Quebec Business Corporations Act, they will be considered to be separate classes for purposes of determining the paid-up capital of the shares of the respective classes. It was noted that s. 47(1) may apply to the shares if they have the same characteristics including rights to paid-up capital.

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.

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 73

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. 5-962766 -

"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."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 48.1 - Subsection 48.1(1) 51

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 (c)

Subparagraph (c)(i)

Administrative Policy

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

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.

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.

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

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 263

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 258

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)

dividend can be received by non-shareholder

Mr and Mrs X hold all the shares of A and B, respectively (both private corporations). Mr X sells all his shares of A to 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 notwithstanding that Mr X does not hold any shares of B, CRA stated (in its summary, with very similar comments in the French body):

Subsection 89(14) and the definition of "eligible dividend" in subsection 89(1) do not refer to dividends paid (or received, as the case may be) "to a shareholder of any class of shares of its capital stock" as provided in subsection 83(2) nor to a dividend paid "on shares of its capital stock" as provided in subsection 129(1). The wording used in the "eligible dividend" provisions is different. Therefore, to be an "eligible dividend" as defined in subsection 89(1) and pursuant to the designation provided for in subsection 89(14), the individual does not have to be a shareholder of any class of shares of the capital stock of the corporation and the deemed dividend paid or received pursuant to paragraph 84.1(1)(b) does not have to be paid by the corporation on shares of its capital stock.

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

dollar amount required for regular dividends

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.

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.