2019-0824471C6 2019 CTF - Q16 - Eligible Dividend Designation

Principal Issues: Can CRA’s administrative relief with respect to how public companies inform their shareholders of the declaration of an eligible dividend be applied to CCPCs?

Position: No.

Reasons: Our position remains unchanged, factors that allow for a public company to declare an eligible dividend are not applicable for CCPCs.

Author: McPherson, Ryan
Section: 89(14)

2019 CTF Annual Conference

CRA Roundtable

Question 16:  Eligible Dividend Designations – Private Corporations

In order for a dividend to be an eligible dividend, subsection 89(14) requires that the dividend must be designated as such by notifying the dividend recipient in writing at the time the dividend is paid. The CRA has taken the administrative position that a public corporation can meet this requirement by posting a statement on its website that “all dividends are eligible dividends unless indicated otherwise.” Similarly, a notice in an annual or quarterly report that an eligible dividend has been paid is considered valid for that quarter. This is a reasonable and practical approach.

Is the CRA willing to adopt a practical approach and extend that administrative position to private corporations by permitting a Canadian-controlled private corporation (CCPC), as that term is defined in subsection 125(7) of the Act, to meet this requirement by providing its shareholders with a written notice in advance that all dividends are eligible dividends unless otherwise indicated?

CRA Response

CRA previously addressed this issue in documents no. 2008-0300381C6 and 2006-0217891Z0. In those documents we stated that administrative relief of the designation requirements of subsection 89(14) of the Act as described above is only applicable to public corporations.

This continues to be the position of the CRA as compelling reasons exist for providing administrative relief from the statutory designation requirements (as described above) solely to public corporations. In particular, it is worthwhile to re-iterate the marked differences in determining eligible dividends for non-CCPCs (of which a public corporation is a subset) versus CCPCs.

A CCPC’s capacity to designate an eligible dividend is generally restricted to the balance in the CCPC’s “general rate income pool” (GRIP), as calculated at the end of the particular taxation year. In broad terms, GRIP is defined as a CCPC’s income which has been subject to the general rate of tax (or, in other words, income that has not benefited from a special rate of tax), eligible dividends received from another Canadian corporation and dividends received from foreign affiliates and deducted in computing taxable income. Additionally, for taxation years that begin after 2018, an eligible dividend paid by a CCPC in a taxation year can only give rise to a dividend refund for that year in respect of its eligible refundable dividend tax on hand (ERDTOH).

In contrast, non-CCPCs are required to calculate their “low-rate income pool” (LRIP) at the time that they designate an eligible dividend. The definition of LRIP is generally limited to a non-CCPC's income that has benefited from the small business deduction, plus any non-eligible dividends that the corporation has received. Unlike a CCPC, a non-CCPC is unrestricted in its capacity to designate eligible dividends, to the extent that it does not have an LRIP balance.

Accordingly, a fundamental difference in the two eligible dividend regimes is that a CCPC must have a GRIP balance at the end of the year in order to designate an eligible dividend and avoid an excessive eligible dividend designation, whereas a non-CCPC must not have an LRIP balance to designate eligible dividends without penalty.

Since it is our understanding that most public corporations will generally not have an LRIP balance, dividends paid by a public corporation should generally be eligible dividends. Consequently, our administrative position with respect to public corporations is intended to alleviate certain administrative hardships vis-à-vis the designation requirements, while continuing to preserve the dividend recipient's entitlement to certainty with respect to the tax implications of corporate distribution.

Thus, while the reasons for extending our administrative position with respect to public corporations are still valid and reasonable, our reasons for not extending this administrative position to CCPCs and non-CCPCs (other than public corporations) are also still valid and reasonable.

In document no. 2009-0347491C6, we provided examples of acceptable notifications of the payment of an eligible dividend from a corporation other than a public corporation to the dividend recipient. Examples of notification included identifying eligible dividends through letters to shareholders and dividend cheque stubs, or where all of the shareholders are Directors of a corporation, a notation in the Minutes.

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

Ryan McPherson
2019-082447
December 3, 2019

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