2022-0922921E5 CEWS, THRP, & HHBRP

Principal Issues: 1. Whether subsection 125.7(2.01) may apply in respect of (a) only actual dividends, or (b) both actual dividends and deemed dividends. 2. What is the meaning of “common share”? 3. What is the meaning of “publicly traded company”? 4. What is the meaning of “subsidiary”?

Position: 1. A “taxable dividend” is defined, for the purposes of the Act, in subsection 89(1) of the Act. A taxable dividend may include a dividend that is deemed to be paid by a provision of the Act. 2. A “common share” is defined, for the purposes of the Act, in subsection 248(1) of the Act as a share the holder of which is not precluded on the reduction or redemption of the capital stock from participating in the assets of the corporation beyond the amount paid up on that share plus a fixed premium and a defined rate of dividend. A share that does not fall within the above-noted definition is not a common share. 3. For the purposes of subsections 125.7(2.01) and (14.1) of the Act, we would consider a publicly traded company as a company the shares of the capital stock of which are listed or traded on a stock exchange or other public market. A company would include a non-resident company. The term “company” refers to a corporation and would not include a partnership or trust. 4. For the purposes of subsections 125.7(2.01) and (14.1) of the Act, we would consider a subsidiary of a publicly traded company to be a corporation over which the publicly traded corporation exercises de jure control either directly or indirectly.

Reasons: See comments.

Author: Pannozzi, Steven
Section: 125.7(2.01), 125.7(14.1)

XXXXXXXXXX                                                               2022-092292
                                                                                       Steven Pannozzi, MTAX

February 22, 2022

Dear XXXXXXXXXX:

Re: Bill C-2 Amendments to section 125.7 of the Income Tax Act

We are writing in response to your email dated December 22, 2021, regarding a list of questions compiled through the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada concerning amendments to section 125.7 of the Income Tax Act (“the Act”) made pursuant to Bill C-2: An Act to provide further support in response to COVID-19, which received Royal Assent on December 17, 2021 (“Bill C-2”). Specifically, your questions pertain to new subsections 125.7(2.01) and (14.1) of the Act.

Please note that not all of the questions submitted are addressed in this technical interpretation as some of them require further analysis. Also note that the numbered questions below correspond to the question numbers in your original inquiry.

Our Comments

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.

Question 3 – Dividends

Can the CRA confirm that only actual legal dividends are caught [by subsection 125.7(2.01)] (i.e., not any deemed dividends arising from share repurchases or PUC returns or PUC increases, etc.)?

CRA Response

New subsections 125.7(2.01) and (14.1) of the Act, as added by Bill C-2, refer to “taxable dividends.” A “taxable dividend” is defined, for the purposes of the Act, in subsection 89(1) of the Act. In our view, the reference to taxable dividends in new subsections 125.7(2.01) and (14.1) means taxable dividends that are legally paid or deemed to be paid by a provision of the Act.

Question 4 – “Common share”

What is a “common share” and what is not?

CRA Response

A “common share” is defined, for the purposes of the Act, in subsection 248(1) of the Act as a share the holder of which is not precluded on the reduction or redemption of the capital stock from participating in the assets of the corporation beyond the amount paid up on that share plus a fixed premium and a defined rate of dividend. A share that does not fall within the above-noted definition is not a common share.

Question 6 – “Publicly traded company”

What is a “publicly traded company”?

a. Does this include companies with only publicly traded debt, for example?
b. What constitutes “public trading”?
c. Does this include a non-resident company?
d. Can a partnership or trust be a “publicly traded company”?

CRA Response

New subsections 125.7(2.01) and (14.1) of the Act refer to a “publicly traded company or a subsidiary of such company”. The term “publicly traded company” is not defined in section 125.7 or elsewhere in the Act. When a word or an expression is not defined in the Act, we generally rely on case law and its ordinary meaning. It should be given a meaning that is consistent with its ordinary meaning and the context and purpose of the provisions in section 125.7 of the Act. In this respect, we note that the definition “executive compensation repayment amount” in subsection 125.7(1) of the Act refers to an eligible entity, the shares of the capital stock of which are listed or traded on a stock exchange or other public market.

The definition “executive compensation repayment amount”, like subsections 125.7(2.01) and (14.1) of the Act, is relevant in limiting subsidies available under subsection 125.7(2) of the Act. Further, the language used in the definition “executive compensation repayment amount” in subsection 125.7(1) as described above is consistent with the ordinary meaning of “publicly traded” as it applies to companies. Accordingly, for the purposes of applying section 125.7 of the Act, we would consider a publicly traded company as a company the shares of the capital stock of which are listed or traded on a stock exchange or other public market. A company would include a non-resident company.

The term “company” is potentially more inclusive than the term corporation. However, read in the context of new subsections 125.7(2.01) and (14.1) of the Act and, in particular, the references therein to “taxable dividends” paid by the company, “holder of common shares” of the company and to a “subsidiary” of such a company, which references are unique to corporations, it is our view that the term “company” refers to a corporation and would not, for the purposes of applying subsections 125.7(2.01) and (14.1) of the Act, include a partnership or trust.

Question 7 – “Subsidiary”

What constitutes a “subsidiary”?

a. Is the standard based on voting control?
b. Is the standard based on percentage of equity interest?
c. Is the standard both or either votes and equity interest?
d. Can a partnership or trust be a “subsidiary”?

CRA Response

The term “subsidiary” is not defined in section 125.7 or elsewhere in the Act. When a word or an expression is not defined in the Act, we generally rely on case law and its ordinary meaning. A “subsidiary” is generally understood to be a corporation that is controlled by another corporation either directly or indirectly through one or more intermediary corporations (see, in this respect, the meaning of “subsidiary” in subsection 2(5) of the Canada Business Corporations Act). Thus, for the purposes of new subsections 125.7(2.01) and (14.1) of the Act, we would consider a subsidiary of a publicly traded company to be a corporation over which the publicly traded corporation exercises de jure control either directly or indirectly.

We trust our comments will be of assistance.

Yours truly,

Amanda Couvrette, CPA, CA
Manager
Business Income and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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