Section 89

A corporation's capital dividend accounts will not be reduced by a loss on the redemption of shares held by it where such loss is deemed to be nil by s. 40(3.6) or 112(3), given that where s. 40(3.6) or 112(3) applies to deem its loss to be nil, it is not considered to have sustained a loss for the purpose of s. 39(1)(b). After referring to the "except as otherwise expressly provided" reference in the s. 40(1) preamble, CRA stated (TaxInterpretations translation):

Our longstanding position is…that subsection 112(3) is an express contrary indication. In accordance with subsection 112(3), the amount of a loss as [otherwise] calculated…is reduced in accordance with that subsection. The resulting loss...is considered to be the loss determined in accordance with paragraph 40(1)(b).

The taxpayer, which was a private corporation, disposed of eligible capital property to a non-arm's-length non-resident sister company ("SisterCo") within the same multinational group in consideration for a promissory note. Audit proposed to apply s. 247(2) to increase the proceeds from the disposition. CRA stated:

[T]he proposed adjustment will result in an increase in the taxpayer's CDA effective to the date of the disputed transaction on the basis of the wording of subsection 247(2) and paragraph (c.2) of the definition of CDA… .

Creditor's group life insurance products generally have no cash surrender value, premiums payable with respect to a particular debtor for this type of products are generally calculated to cover the cost of insurance over the term of the certificate, that is, the term of the loan, and if an ACB calculation were effected with respect to each particular certificate holder, the result would generally be a very low figure, if not nil. On the basis of this understanding:

CRA is prepared to accept that the full amount of the death benefit be added to the corporate debtor's CDA, without a reduction by the ACB.

Where Mr. A, who owns 50% of the shares of a CCPC ("Gesco") having net capital losses of $200,000, purchases the other 50% shareholding of Mr. B, thereby giving rise to an acquisition of control of Gesco, such net capital losses will still be taken into account in computing the CDA of Gesco following the acquisition of control (Tax Interpretations Translation):

...we are of the opinion that the fact that the net capital losses of Gesco are not deductible in the calculation of its taxable income for a taxation year ending after the acquisition of control, by virtue of paragraph 111(4)(a), has no effect on the calculation of the CDA of Gesco.

Where a private corporation holding flow-through shares as capital property gifts the shares to a qualified donee, it will include the capital gain from the gift in computing its CDA, but deduct an amount equal to the taxable portion of the deemed capital gain under s. 40(12).

Shareholders of a corporation use a buy-sell agreement to requires the corporation to acquire insurance on the shareholders' lives (and pay the premiums thereunder) to fund share purchase obligations under the agreement, and further agree to use a third party (the "Insurance Trustee") to hold and apply the insurance proceeds as directed under the agreement, with the corporation being required to pay any insurance proceeds over to the Insurance Trustee upon receipt. Before indicating that such proceeds would be added to the capital dividend account of the corporation as amounts received by it, CRA stated:

A trustee can reasonably be considered to act as agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee's only function is to hold legal title to the property. In order for the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trust to consult and take instructions from each and every beneficiary with respect to all dealings with all of the trust property.

On the same facts as for Q. 6.1 above except that the buy-sell agreement gives an irrevocable direction to the insurer to pay the proceeds over to the Insurance Trustee upon the death of a shareholder, CRA stated:

if the Insurance Trustee can reasonably be considered to act as agent for its sole beneficiary Corporation A such that the arrangement is deemed not to be a trust for the purposes of the Act, Corporation A may generally be considered to have received insurance proceeds for purposes of its capital dividend account provided that the irrevocable direction given by Corporation A to the insurer would not in any way negate the agency relationship between Corporation A and the Insurance Trustee.

On the same facts as for Q. 6.1 above except that the insurance policy names the Insurance Trustee as the beneficiary of the policy, for example, "as beneficiary in trust as bare trustee for the Corporation" - or simply names the Insurance Trustee without specific reference to its capacity as a bare trustee or agent, CRA stated:

if the Insurance Trustee can reasonably be considered to act as agent for its sole beneficiary Corporation A such that the arrangement is deemed not to be a trust for the purposes of the Act, Corporation A would generally be considered to have received insurance proceeds for purposes of its capital dividend account.

A deemed capital gain arising under s. 80(12) will result in an addition to the corporation's capital dividend account.

if in the year prior to the sale of Opco by Holdco, Opco pays a dividend to Holdco which is subject to s. 55(2), s. 55(2)(b) generally would apply to trigger a capital gain and, thus, an addition to the capital dividend account, at the time of the disposition of the Opco shares. However, if s. 55(2)(c) instead applied , there would be deemed to be a capital gain of the corporation for the year in which the dividend was received, so that the resulting addition to the capital dividend account could only be distributed in the following years.

Each of the partners of a partnership with a fiscal period end of April 30, 200X and which disposed of eligible capital property in that year is a Canadian-controlled private corporation. CRA stated:

[T]he corporate partner's share of an amount required by paragraph 14(1)(b)…to be included in the partnership's income for its fiscal period ending April 30, 2000X would be included in the particular corporate partner's computation of its CDA at the end of the partnership's fiscal period such that it would be available to be paid to the corporate partner's shareholders as a capital dividend on or after May 1, 200X.

A reduction of net capital losses pursuant to s. 80(4) would not be taken into consideration in computing a private corporation's capital dividend account given that s. 80(4)(b) has no effect on the amount of capital losses and allowable capital losses sustained by the taxpayer.

A capital gains reserve taken in a taxation year will be included in the calculation of the capital dividend account balance on the first day of the subsequent taxation year.

"We would normally expect the partnership agreement to determine a particular partner's share of a capital dividend received by the partnership and the timing of its inclusion in the CDA of the partner. For example, if the partnership agreement provides that a particular corporate partner is entitled to a share of a capital dividend at the time the dividend is received by the partnership, we would allow that partner to include its share of the dividend in its CDA at that time. However, if the partnership agreement provides that a capital dividend received by the partnership is to be shared by the members of the partnership at the end of the partnership's fiscal period, a particular corporate partner would only be permitted to include its share of that dividend in its CDA at that time."

An addition to the CDA as a result of a disposition of goodwill can only be accessed through a capital dividend following the taxation year in which the disposition occurred. CRA stated (TaxInterpretations translation):

[T]he amount potentially included in income by virtue of paragraph 14(1)(b)...cannot be determined until the end of the taxation year... . Consequently, a corporation cannot include an amount in its CDA, respecting a disposition of goodwill...until the end of the taxation year during which such disposition took place.

"Where, for example, a particular corporation is a member of a partnership which realized a capital gain in its fiscal period ending April 30, 2001 and the corporation's taxation year ends on December 31, the corporate partner's share of the capital gain, (including the untaxed portion thereof), would be added to the partner's CDA at April 30, 2001, i.e., in the corporate partner's taxation year ending December 31, 2001."

Because the amount in paragraph (a) cannot be less than zero, a company had a positive capital dividend account as a result of disposing of eligible capital property notwithstanding that its capital dividends and capital losses exceeded its capital gains.

Where a corporation is the beneficiary of a life insurance policy but is not the policyholder and has, therefore, not paid the premiums in respect of the policy, the adjusted cost basis of the policy to the corporation will be nil, with the result that the full proceeds of the life insurance policy will be added to the corporation's capital dividend account.

There is no requirement that the shareholders to whom a capital dividend is to be paid must have been shareholders at the time the corporation received the life insurance proceeds out of which the dividend will be paid.

In order for life insurance proceeds to be included in the capital dividend account of a corporation, the proceeds must be considered to be received by the corporation. If the amounts are received by a trust, other than a bare trust, and then distributed to the corporation, they are not considered to have been so received. A corporation can be considered to have received the proceeds of a life insurance policy which it owned and on which it paid the premiums where it directed the payments to a third party provided the corporation was the beneficiary under the policy.

S.245 potentially could apply to a back-to-back insurance strategy which provided for the purchase of a term life insurance policy providing a death benefit equal to the premium paid to acquire a life annuity, if the purpose of the arrangement was to provide an addition to the capital dividend account in circumstances where the death benefit could be considered a return of an investment.

An advance payment of part of the sum assured under a policy where the life expectancy of the insured is less than two years due to a medically incurable condition will not qualify as having been received "in consequence of the death of any person" because such phrase refers to amounts received after the death of the insured and not to amounts received in contemplation of her death.

Where two personal holding companies each own 50% of the shares of Opco and each holding company is the owner of an insurance policy on the life of the individual shareholder of the other holding company and whose beneficiary is the other holding company, the full amount of the insurance proceeds will be added to the capital dividend account of the other holding company.

Where an individual owns a life insurance policy and pays all the premiums, but a corporation is the beneficiary, the corporation will add the proceeds of the policy to its capital dividend account.

The amount of 1% of a price paid to the vendor of a winning lottery ticket under Lotto-Québec would not be included in the vendor corporation's capital dividend account.

In computing the capital dividend account of a corporation following the winding-up of the wholly-owned subsidiary, separate calculations must be made under ss.89(1)(b) and 87(2)(z.1).

A business investment loss is a capital loss, and therefore will reduce a taxpayer's capital dividend account.

Targetco is a CCPC owned by Sellco (also a CCPC) and has a GRIP account of $2.6M. However, the safe income on hand of Sellco in respect of the Targetco shares is only $2M. A dividend received by Sellco in excess of $2M would not augment its own GRIP. Accordingly, it is proposed that:

1. Targetco pays a dividend of $2M out of its safe income and also designates it as an eligible dividend under s. 89(14).
2. Sellco subscribes for $0.6M of preferred shares of Targetco.
3. The paid-up capital of the preferred shares is reduced to a nominal amount without any distribution being made.
4. Targetco redeems the preferred shares for $0.6M and designates the $0.6M deemed dividend under s. 89(14). S. 55(2) does not apply as the shares' ACB is $0.6M.

Respecting whether Targetco would be considered to have made an "excessive eligible dividend designation" under (c) of the definition, CRA stated (TaxInterpretations translation):

In the situation described above, Targetco is the only corporation which will pay a dividend and whose GRIP will be reduced. The contemplated transactions will not, by themselves, have the effect of maintaining or increasing the GRIP of Targetco. Consequently, the contemplated transactions, by themselves, would not engage paragraph (c) of the EEDD definition.

However, on a subsequent payment (after the contemplated transactions) of an eligible dividend by Sellco, it would be necessary to examine whether paragraph (c)…was applicable… .

Holdco, which is unrelated to Opco or any other shareholder, holds 30% of both the Class A common and Class B preferred shares of Opco. Its Class B preferred shares have a redemption amount of $600,00, an adjusted cost base of $180,000, a nominal paid-up capital and attributable safe income on hand of $75,000. Opco's GRIP is $250,000. Opco redeems Holdco's Class B preferred shares for $600,000 and makes s. 55(5)(f) designations so that there are deemed to be separate dividends totalling $75,000.

If Opco designates $250,000 of the deemed dividends as an eligible dividend, its GRIP would be reduced by $250,000. However, Holdco's GRIP would increase by only $75,000 if s. 55(2) applied.

If Opco instead made an eligible dividend designation of $75,000 to correspond with the deemed dividend receipt of Holdco, CRA would consider such $75,000 receipt to be eligible dividends (TaxInterpretations translation):

We would no prorate the eligible dividends between the separate dividends totalling $75,000 and the dividend which is deemed not be a dividend by virtue of subsection 55(2).

A Canadian-resident corporation (Corporation A), which presents performances of an artist (A) who is its sole shareholder, became a Canadian-controlled private corporation on January 1, 2010 as a result of A becoming resident in Canada. Its increase under s. 89(4) was nil, and variable A of the definition of general rate income pool was nil. Corporation A incurs a non-capital loss in 2010 of $80,000, which is carried back to reduce its full rate taxable income (FRTI), as defined in s. 123.4(1), for 2007 to 2009. It has not paid or received dividends. CRA stated (TaxInterpretations translation) that:

Corporation A technically is required to reduce its GRIP in order to account for the claiming of its 2010 loss as a deduction from its FRTI for 2007 to 2009 by virtue of variable B of the definition of GRIP in subsection 89(1). Consequently…the GRIP amount of Corporation A becomes negative by an amount corresponding to variable B in the GRIP definition….

Where a CCPC pays an eligible dividend across a single class of shares owned 50/50 by a Canadian resident individual and a Canadian resident CCPC, both of whom are not related, can the CRA confirm that there is no reduction in the payer CCPC's GRIP in respect of an eligible dividend for the portion of the dividend that s. 55(2) applies to, where the dividend exceeds the safe income attributable to the shares owned by the recipient CCPC? In responding negatively, CRA stated:

[T]he effect of the deeming provision in paragraph 55(2)(a) should be limited to the dividend recipient and should have no bearing on the computation of the GRIP of the payer CCPC.

CRA stated that "to the extent [the applicable State corporate] laws and constating documents do not provide for stated capital akin to that which is provided for under Canadian domestic corporate law but, rather, provide for an attribute that is akin to a partner's capital account, [a] US LLC would not…have stated capital" – and therefore would have no paid-up capital for s. 90(3) purposes. See summary under s. 90(3).

If classes of shares with identical characteristics are created under the Quebec Business Corporations Act, they will be considered to be separate classes for purposes of determining the paid-up capital of the shares of the respective classes. It was noted that s. 47(1) may apply to the shares if they have the same characteristics including rights to paid-up capital.

Because where a transaction is on capital account, the Canadian dollar value of the transaction is calculated at the exchange rate prevailing at the time of the transaction, the paid-up capital of shares maintained in a foreign currency is determined by converting the foreign currency amount to Canadian currency at the exchange rate at the time the shares were issued.

Proposed transactions

Bidco, which is a wholly-owned Canadian-resident subsidiary of Holdco2, which is a non-resident wholly-owned subsidiary of a non-resident public company (Holdco1), will acquire (pursuant to a plan of arrangement) all the issued and outstanding common shares of Pubco, which is a Canadian-resident public company whose common shares are listed on the Exchange. The applicable rules result in the inability to delist common shares of Pubco from the Exchange until three business days after the Effective Date of the plan of arrangement. Bidco and Pubco will amalgamate, with the share capital of "Amalco" being identical to that of Bidco. Three days after the Effective Date, the shares of Pubco will be so delisted. Amalco will then file an election not to be a public corporation pursuant to s. (c)(i) of the definition of "public corporation" in s. 89(1) whose effective date (as recorded on Form T2067) will be the later of four business days following the Effective Date or soon as practically possible after the receipt of a positive ruling.

Ruling

"Amalco will meet the condition in paragraph 4800(2)(a) of the Regulations and will cease to be a public corporation at the time it files an election, in prescribed manner, not to be a public corporation pursuant to subparagraph (c)(i) of the definition of "public corporation" under subsection 89(1)." The summary states:

Since as a matter of tax policy, a corporation in this situation should not be precluded from electing not to be a public corporation, the condition in Regulation 4800(2)(a) can be read as applying where previously listed shares no longer exist.

Are federal Crown corporations not prescribed in Regs. 6700 and 7100 considered public corporations for purposes of the definition of Canadian-controlled private corporation? CRA stated (TaxInterpretations translation):

Certain crown corporations for purposes of the application of particular provisions are deemed to not be private corporations, but such deeming does not have the effect of rendering such corporations public corporations for income tax purposes. Consequently, it is possible that a corporation resident in Canada will be neither private nor public. …[G]enerally a crown corporation which is not prescribed under Reg. 7100 of which the Government of Canada is the sole shareholder cannot satisfy the conditions for being a public corporation.

A wholly-owned subsidiary (Subco) of a public corporation (Pubco) that has never elected to be a public corporation itself, will not itself be a public corporation (although it also will not qualify as a private corporation). Accordingly, on a sale of Subco to a Canadian-resident individual, there is no need for Subco to make the election in para. (c) to not be a public corporation, in order for Subco to qualify in the hands of the purchaser as a Canadian-controlled private corporation.

"The Department takes the view that shares that are conditionally listed will not be listed for purposes of the Act until the time at which all of the conditions for the listings have been satisfied. However, the Department is prepared to accept that shares are listed on an exchange if the exchange considers them to have an unqualified listing prior to the date set for the shares to be called for trading."