Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether a corporation may designate a U.S. dollar dividend as an eligible dividend such that the dividend will qualify for the enhanced dividend tax credit.
Reasons: See analysis below.
Author: Ng, Tania
Section: 89(1), 89(14), 82(1), 121(b), 261(1), 261(2)
November 20, 2015
Re: Foreign Currency Denominated Dividends
We are writing in reply to your email, in which you requested our comments with respect to whether a U.S. dollar dividend could be designated as an eligible dividend such that the dividend would qualify for the enhanced dividend tax credit.
You indicate that the corporation paying dividends in U.S. dollars is a Canadian resident corporation for the purposes of the Income Tax Act (the “Act”). The corporation is listed on a stock exchange in the United States and from time to time, it declares and pays dividends in U.S. dollars. The corporation did not file an election pursuant to subsection 261(3) of the Act to report in U.S. dollars. Currently, the corporation does not designate such dividends as eligible dividends under subsection 89(14) of the Act but it wants to make such designations so that the future U.S. dollar dividends paid will qualify for the enhanced dividend tax credit.
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.
The term “eligible dividend” is defined in subsection 89(1) of the Act to be the portion of a taxable dividend that is received by a person resident in Canada from a corporation resident in Canada that is designated as such pursuant to subsection 89(14) of the Act. A “taxable dividend” is defined in subsection 89(1) and essentially means a dividend (irrespective of the currency in which it is paid) other than a capital dividend. Under subsection 89(14), a corporation can designate a taxable dividend (or a portion thereof) as an eligible dividend by providing written notification before or at the time of payment to each person or partnership to whom the dividend is paid. Accordingly, it is our view that the provisions of the Act allow a corporation to designate a taxable dividend to be an eligible dividend, even though it is paid in a currency other than the Canadian dollar.
Subsection 261(2) of the Act provides that in determining the Canadian tax results of a taxpayer (as defined in subsection 261(1) of the Act), Canadian currency is to be used. That subsection also provides that if a particular amount that is relevant in computing those Canadian tax results is expressed in a currency other than the Canadian currency, the particular amount is to be converted to an amount expressed in Canadian currency using the relevant spot rate for the day on which the particular amount arose.
The definition of “Canadian tax results” in subsection 261(1) provides:
“Canadian tax results” of a taxpayer for a taxation year means
(a) the amount of the income, taxable income or taxable income earned in Canada of the taxpayer for the taxation year;
(b) the amount […] of tax or other amount payable under this Act by the taxpayer in respect of the taxation year;
(c) the amount […] of tax or other amount refundable under this Act to the taxpayer in respect of the taxation year; and
(d) any amount that is relevant in determining the amounts described in respect of the taxpayer under paragraphs (a) to (c).
The amount of an eligible dividend to be included in income under paragraph 82(1)(a.1) of the Act, the enhanced dividend tax credit that is available to recipients of eligible dividends under paragraph 121(b) of the Act, the portion of a dividend that is designated as an eligible dividend under subsection 89(14) and the addition to the “general rate income pool” as defined under subsection 89(1) of the Act are all Canadian tax results described in subsection 261(1).
For the purposes of identifying the relevant spot rate that should be used to convert the amount of a designated dividend into Canadian dollars, the day on which the portion of the amount of a dividend that is designated as an eligible dividend “arises” for the purposes of subsection 261(2) of the Act has to be determined. Pursuant to subsection 82(1) of the Act, a dividend is taxable only when it has been received. We are of the view that a mere receivable arising as a result of a declaration of the dividend should not result in an “amount received” by a taxpayer such that there would be no income inclusion. Our view is supported by the Federal Court’s decision in Banner Pharmacaps NRO Ltd. v. The Queen. (footnote 1) Accordingly, it is our view that the amount of a dividend does not arise until it is considered to be received, and is thus included in income. This typically occurs when the dividend is actually paid, which is also the time at which an eligible dividend designation is required to be made pursuant to subsection 89(14).
As such, the portion of the dividend that is designated as an eligible dividend under subsection 89(14) is a portion of the amount of such dividend converted in Canadian dollars using the relevant spot rate for the day the dividend is paid. The expression “relevant spot rate” is defined in subsection 261(1) and means, in respect of the conversion of an amount from a particular currency into another currency for a particular day when the other currency is Canadian currency, generally, the rate quoted by the Bank of Canada for noon on that day.
The amount in Canadian dollars that is so designated is the amount of the eligible dividend that would generally be included in the income of the recipient under paragraph 82(1)(a.1) of the Act and on which an individual can claim an enhanced credit under paragraph 121(b) of the Act. Where the recipient is a corporation, such amount in Canadian dollars can generally be deducted under subsection 112(1) of the Act and would be added to the “general rate income pool” as defined under subsection 89(1) of the Act.
We trust that our comments will be of assistance.
Corporate Reorganizations Section II
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 2003 FCA 367.
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