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: Manner of calculating GRIP. (1) Calculation of GRIP for first taxation year of corporation ending after 2005 (2) Must a negative "opening GRIP" balance (determined under the formula A - B in subsection 89(7)) be carried forward into the computation of GRIP? (3) Why does line 300 of T2 Schedule 53 only take into consideration eligible dividends paid in the previous taxation year? (4) Whether taxable dividend paid by CCPC in 2005 calendar year, but in taxation year of CCPC ending after 2005 has any impact on GRIP calculation?
Position: (1) Full amount of taxable income is included in computation of GRIP for first taxation year ending after 2005, including income attributable to pre-2006 portion of that taxation year. (2) No. (3) GRIP formula only takes into account dividends paid in previous year. However, if eligible dividends in current year exceed GRIP, an excessive eligible dividend designation will result. (4) No impact.
Reasons: Plain wording of the provisions
2007-025772
XXXXXXXXXX J. MacGillivray
(613) 957-2053
January 9, 2008
Dear Sir:
Re: General Rate Income Pool Calculation
We are writing in response to your e-mail of October 25, 2007 in which you requested guidance with respect to the calculation of the "general rate income pool" ("GRIP") of a Canadian-controlled private corporation ("CCPC"), as those terms are defined pursuant to subsections 89(1) and 125(7) of the Income Tax Act (Canada) (the "Act"), respectively.
You have posed the following questions:
1. Whether a CCPC with a fiscal period that straddled January 1, 2006 is required to include the income allocable to the pre-2006 portion of the fiscal period in the computation of the amount determined under subsection 89(7) of the Act, with the balance of the income for that fiscal period added in the computation of GRIP for 2006?
2. If a negative amount is determined after subtracting the value for B from the value for A under subsection 89(7) in respect of a corporation, whether that negative amount would be carried forward to reduce the corporation's GRIP?
3. Why does line 300 of T2 Schedule 53 "General Rate Income Pool (GRIP) Calculation" only take into account dividends paid in previous years and not dividends paid in the year for which the GRIP is being calculated?
Finally, you described the following scenario. Aco, a CCPC, had a taxation year that commenced on May 1, 2005 and ended on April 30, 2006. During that taxation year, but prior to January 1, 2006, Aco redeemed a number of its shares, with the result that Aco was deemed to have paid taxable dividends at the time of the share redemptions pursuant to paragraph 84(3)(a). You asked whether the amount of those taxable dividends would reduce the amount of Aco's GRIP, or, alternatively, whether that amount would be relevant in computing the amount of Aco's GRIP pursuant to subsection 89(7) for the purposes of the value for "C" in the definition of GRIP.
In your letter, you have outlined what appears to be an actual fact situation related to a particular corporation. The review of such situations is the responsibility of the local Tax Services Office that is responsible for administering the tax affairs of the taxpayers in question. Furthermore, it is the practice of the Canada Revenue Agency not to comment on such situations when the identities of the taxpayers are not known. We can, however, provide you with the following general comments, which we hope will be of assistance.
The definition of GRIP under subsection 89(1) of the Act is applicable to taxation years that end after 2005. The GRIP of a taxable Canadian corporation that is a CCPC or a deposit insurance corporation is an amount that is determined at the end of the corporation's taxation year. Pursuant to paragraph 249(1)(a), a corporation's taxation year is its fiscal period, which need not be a calendar year.
The GRIP balance, which may be a positive or negative amount, is determined by the formula "A - B". The value for A in this formula, which may also be a positive or negative amount, is determined by the formula "C + 0.68 (D - E - F) + G + H - I". In the case of a CCPC, the value for D in this formula is the corporation's taxable income for the taxation year in respect of which the corporation's GRIP is being calculated. Accordingly, to answer your first question, in the case where a CCPC had a non-calendar taxation year (i.e., a non-calendar fiscal period) ending in 2006 that included a part of 2005, the full amount of the corporation's taxable income for that taxation year is added in computing the value for D in determining the balance of the corporation's GRIP at the end of that taxation year.
The value for C of the formula is equal to the balance of the corporation's GRIP at the end of the preceding taxation year. For the first taxation year of a CCPC that ends after December 31, 2005, provided that the CCPC was (or, but for an election under subsection 89(11), would have been) a CCPC throughout that taxation year, the CCPC's GRIP at the end of its immediately preceding taxation year will be the amount determined pursuant to subsection 89(7) of the Act. Otherwise, the value for C in respect of the GRIP computation for that taxation year will be nil. For subsequent taxation years, the value for C in the GRIP computation is not determined under subsection 89(7), but instead is equal to the closing GRIP balance at the end of the preceding taxation year.
If subsection 89(7) is relevant to the determination of the value for C in the GRIP formula, the GRIP at the end of the immediately preceding taxation year of the corporation will be equal to the greater of nil and the amount determined by the formula A-B. Accordingly, in response to your second question, any negative amount that may be computed under the formula will not be carried forward to reduce the corporation's GRIP in the following taxation year.
In determining the GRIP of a CCPC or a deposit insurance corporation for a particular taxation year, where the corporation was a CCPC or a deposit insurance corporation throughout its preceding taxation year, the value for I in the definition of GRIP, which reduces the amount determined for A in the formula 'A - B' in the definition of GRIP, will be equal to the amount by which the total amount of eligible dividends paid by the corporation in the preceding taxation year exceeds the total excessive eligible dividend designations made by the corporation in the preceding taxation year. Therefore, in response to your third question, eligible dividends paid by the corporation in the taxation year for which GRIP is being calculated (i.e., the current year) are not taken into account in determining GRIP until the following taxation year. However, if the amount of eligible dividends paid by the corporation in the current year exceeds the corporation's GRIP at the end of the current year, the corporation will have made an "excessive eligible dividend designation", under paragraph (a) of the definition of that term in subsection 89(1), for the current year and will be liable for tax under Part III.1 of the Act.
As for the scenario you described concerning the payment of taxable dividends by Aco prior to January 1, 2006 in its taxation year which commenced on May 1, 2005 and ended on April 30, 2006, it is our view that the amount of those taxable dividends would not reduce Aco's GRIP, nor would that amount be taken into account in calculating any amount under subsection 89(7) of the Act in respect of Aco. As stated in the preceding paragraph, only eligible dividends paid by the corporation are factored into the value for I in the definition of GRIP. The definition of "eligible dividend" in subsection 89(1) provides that dividends paid by a corporation after 2005 may be designated as an eligible dividend. Therefore, any dividend paid before 2006, such as the dividend that Aco is deemed to have paid on the redemption of its shares, cannot be an eligible dividend. As discussed above, the only dividends included in the value for B in the subsection 89(7) calculation are taxable dividends paid by the corporation in taxation years that end after 2000 and before 2006. Since Aco was deemed to have paid dividends on the redemptions of its shares in a taxation year of Aco that did not end before 2006, the amount of those dividends is not included in computing the value for B in subsection 89(7) and does not reduce the amount otherwise determined under subsection 89(7).
Although this result may not be in accordance with the policy of the legislation, since the dividends paid in the pre-2006 portion of the taxation year may represent a distribution of the corporation's full rate taxable income, the Department of Finance has been advised that the current legislation governing the computation of GRIP will apply in this manner.
Our comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular IC 70-6R5, dated May 17, 2002.
Yours Truly,
David Palamar
Manager
Corporate Reorganizations Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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