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: Is a deemed dividend under ss. 214(16) considered to be a “taxable dividend” for all purposes of the Act?
Reasons: Ss. 214(16) applies only for purposes of Part XIII of the Act.
Author: Young, Terry
Section: 214(16), 212(2), 248(1), 89(1)
October 5, 2017
Dave Beaulne HEADQUARTERS
Director, International Division Income Tax Rulings
Income Tax Rulings Directorate Directorate
Deemed dividend under subsection 214(16) of the Income Tax Act
The issues discussed herein were brought to our attention by a representative in a letter to which we responded by phone. However, since similar issues may arise in the context of other provisions of the Income Tax Act (the “Act”) and may be of interest to a broader audience, we would like to document our conclusions in this memorandum, which will be provided to the tax publishers in severed format.
In the letter submitted to us, the representative asked us to comment on the application of subsection 214(16), and certain other provisions discussed below, in the following hypothetical scenario:
1. CanCo and ForCo are wholly owned subsidiaries of ParentCo.
2. CanCo and ParentCo are corporations resident in Canada.
3. ForCo is a non-resident corporation and a controlled foreign affiliate of ParentCo.
4. CanCo has an interest-bearing loan payable to ForCo and paid interest to ForCo in a particular taxation year.
5. A portion of the interest paid by CanCo to ForCo is not deductible pursuant to subsection 18(4) and is deemed by subsection 214(16) to have been paid by CanCo as a “dividend” and not interest.
6. CanCo designated under paragraph 214(16)(b) a certain interest payment made in the year to be a dividend, in its return of income under Part I.
Paragraph 212(2)(a) imposes Part XIII tax in respect of a “taxable dividend”, which pursuant to subsections 248(1) and 89(1) includes any dividend, with certain exceptions that do not apply in this case. Therefore, the deemed dividend in this scenario would be a “taxable dividend” to which paragraph 212(2)(a) would apply. In the submission to us, the representative noted that the definition “taxable dividend” applies for the purposes of the Act and on this basis he asked whether the deemed dividend under subsection 214(16) would be considered to be a “taxable dividend” for all purposes of the Act. Specifically he wanted to know:
(a) whether, given the designation under paragraph 214(16)(b), CanCo should make corresponding adjustments to either its low rate income pool (“LRIP”) or general rate income pool (“GRIP”) (as applicable) at the time the deemed dividend is paid; and
(b) whether the amount received by ForCo would be characterized as a dividend rather than interest with the result that it would not be included in the income of ParentCo as foreign accrual property income (“FAPI”) of ForCo.
Pursuant to the preamble in subsection 214(16), both paragraphs (a) and (b) of subsection 214(16) apply for the purposes of Part XIII. Therefore, the non-deductible portion of the amount paid or credited as interest is deemed to have been paid or credited as a dividend solely for purposes of Part XIII, including the designation under paragraph (b).
Even though the definition “taxable dividend” applies for the purposes of the Act, the interest paid or credited under subsection 214(16) is deemed to have been paid as a dividend solely for the purposes of Part XIII and, accordingly, it is considered to be a “taxable dividend” solely for the purposes of Part XIII. Therefore, in the scenario described above, CanCo’s LRIP/GRIP balances (as applicable) would not be affected. Similarly, subsection 214(16) would not alter the character of the income received by ForCo for FAPI purposes.
Terry Young, CPA, CA
Section Manager, International Section I
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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