Eligible Dividends – Years Prior To 2006

Volume No. 06-35

“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.


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