Tax Tip[] Eligible Dividends

Eligible Dividends And Real Estate Companies

“Old rules of thumb need to be re-examined carefully.”

The changes to the taxation of eligible dividends have changed the Canadian tax planning landscape dramatically. Old rules of thumb need to be re-examinedcarefully. One such example will be discussed in this tax tip.

Integration is a concept that is critical to Canadian taxation. Integration is when income earned by a corporation is taxed at the same combined corporate and personalrates as if the income had been earned directly by the individual. Prior to the introduction of these eligible dividend rules, active business income of a Canadian-controlled private corporation (CCPC) in excess of the small business limit was not integrated.

A separate Realty Co (“Realco”) was often set up for creditor-proofing reasons.Any rental payment made from the operating company to the Realco was deemed to beactive business income to the Realco (assuming the companies were associated).If the aggregate taxable income of both companies was in excess of the small business limit, such excess income was subject to combined personal and corporate tax rate of approximately 50%-55% depending on the province.

A simple planning solution was to dis-associate these two companies for income tax purposes by having one spouse wholly own the Realco and the other spouse own the operating company. Due to the refundable taxes and dividend refund, the combined corporate and personal rate of tax is roughly the same rate as the highest marginal rate of personal tax. The operating company would be able to utilize fully the small business deduction.

The eligible dividend rules have changed this strategy completely. Planners now want the two companies to be associated. There are two advantages of such a structure.First, the income in excess of the small business limit would be taxed at a lower corporate tax rate in an associated company rather than in a related company. Second, the eligible dividends paid out of high rate income will result in a tax rate that is close to integration. This varies widely among the provinces. This could be done by having the same spouse wholly-own both corporations.

This is but one example where one may wish to associate companies because of the eligible dividend rules whereas in the past disassociation of the two companies would be preferred. Now more than ever consultation with a tax advisor is of paramount importance in the planning stage of any transaction.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Designation of Eligible Dividends – 2006/2007

“CRA gives guidance on 2006 and 2007 eligible dividend designations.”

The CRA recently released some guidance for the 2006 and subsequent taxation years for eligible dividends. The key points are as follows:

  1. In 2006, the CRA will accept eligible dividend designations based only on the identification of eligible dividends on T3 and T5 slips
  2. For 2007, and subsequent taxation years, appropriate notification includes identifying eligible dividends through letters to shareholders, dividend cheque stubs or a notation in the minutes where all the shareholders are directors of corporations.

  3. For 2006, an eligible dividend can be designated as part of a dividend paid. That is, if $10,000 of dividends are paid, a corporation can designate $6,000 of those dividends to be eligible dividends. For 2007 and subsequent years, a designation will not be accepted in respect of a portion of dividends paid. Instead, all of a dividend payment must be designated as an eligible dividend.

  4. The CRA acknowledges that for 2006, a trust may not be aware of the exact amount of eligible dividends received as a trust may be waiting for mutual funds slips which are issued at the same time as the trust must complete its trust return. The CRA has said that the trust can make “reasonable assumptions” in determining whether to identify dividends as eligible dividends. However, the CRA goes on to say that the trust must amend the T3 slips and return if the assumption is inaccurate except for amounts that are less than $100.

  5. Any dividends paid to a class of shares must all be designated as eligible dividends. That is, a corporation cannot designate eligible dividends to certain shareholders and ineligible dividends to other shareholders where they all own the same class of shares.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Eligible Dividends – Years Prior To 2006

“Inter-company dividends must be reviewed carefully for years between 2000 and 2006.”

The government issued proposed legislation on October 16, 2006 that included changes to the calculation of the General Rate Income Pool (“GRIP”) addition for 2006. These changes relate only to the periods between 2000 and 2006. One of the key changes was the inclusion in GRIP of certain dividends received. The GRIP addition for those companies that were Canadian-controlled private corporations as of January 1, 2006 will now include dividends that meet the following test:

  • The dividend was deductible under subsection 112(1) to the recipient corporation.
  • The dividends were received for taxation years of the corporation that ended after 2000 and before 2006.
  • It is in respect of dividends received from a corporation that was, at the time the dividend was paid, a “connected corporation.”
  • It is reasonable to consider, having regard to all the circumstances that the dividend was attributable to an amount that would have been included in the payor corporation’s GRIP account.

This proposal attempts to deal with the problem that existed in the original proposed legislation in that there was a deduction for a company that paid a dividend, but there was no inclusion in the GRIP for the company that received the dividend. The one issue that stands out with this proposed legislation is a situation where an operating company did not earn income for a few years and then paid a dividend in a subsequent year. Consider a company that had retained earnings as of 2000, had no profits for the next few years, and then paid a dividend in 2005. It appears that this dividend payment would reduce the GRIP in the operating company (payor) and not increase the GRIP in the holding company (recipient). The reason why it would not increase the GRIP in the holding company is that there is only GRIP calculation for the years 2001 to 2005. Therefore, if the retained earnings are based on income earned before 2001, then it is not possible for the payment to have been made out of the operating company’s GRIP. On an overall basis, dividends paid, in a situation like this, will reduce the GRIP in the operating company and not increase the GRIP in the holding company.

A careful review of all prior years’ tax returns will be necessary to determine the proper GRIP calculation for the opening amount as of January 1, 2006.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.