Chapter History S3-F2-C2, Taxable Dividends from Corporations Resident in Canada
Introduction
The purpose of a Chapter History page is to highlight any amendments to the information contained in a chapter of an income tax folio, including amendments to the information originally contained in an interpretation bulletin that has been cancelled and replaced with a folio chapter. It outlines amendments that have been made as a result of legislative changes and proposed legislative changes, precedential court decisions, as well as new or revised interpretations of the Canada Revenue Agency (CRA).
Except as otherwise noted, all statutory references herein are references to provisions of the Income Tax Act, R.S.C., 1985, c.1 (5th Supp.), as amended and all references to a Regulation are to the Income Tax Regulations, C.R.C., c.945, as amended.
Updated October 7, 2024
¶2.5 has been updated to add a reference to subsection 89(1) for each of the definitions of private corporation and public corporation.
¶2.69, 2.70, and 2.121 (Variables E and F) have been modified to replace the word “element” or “factor” with the word “variable” for more consistent terminology in the formuli explained in the Chapter. This modification is applicable to the English version of the Chapter only.
¶2.77 has been modifed in the first sentence to replace the wording “…subsection 89(14.1) describes the conditions under which…” with the wording “…subsection 89(14.1) describes certain conditions under which…” for improved accuracy.
¶2.81.1 has been added to reflect the introduction of an additional late designation per new subsection 89(14.2) by S.C. 2024, c.17, s.20, which is applicable on the date of Royal Assent on June 20, 2024. In light of this revision, the related Notice of proposed legislative change has been removed.
¶2.82 has been updated to add a reference to subsection 89(14.2) in the final sentence.
¶2.121 has been updated to reflect amendments to variables D and G of the computation of LRIP in subsection 89(1) by S.C. 2024, c.15, s.20, in force on June 20, 2024 (Royal Assent). These amendments are applicable to tax years that begin after April 6, 2022. In light of this revision, the related Notice of proposed legislative change has been removed.
Updated February 8, 2024
General
Income Tax Folio S3-F2-C2, Taxable Dividends from Corporations Resident in Canada, consolidates, replaces and cancels Interpretation Bulletin IT–67R3, Taxable Dividends from Corporations Resident in Canada.
In addition to consolidating the content of the former interpretation bulletin, general revisions have been made to improve readability. Any substantive technical and interpretive changes to the information outlined in the former interpretation bulletin are described below.
Legislative and other changes
¶2.1 to ¶2.15 under the heading Overview of taxable dividends have been added to provide a simplified version of the detailed discussion of taxable dividends that follows.
¶2.16 (formerly included in ¶1 of IT-67R3) has been revised, adding the words “as it applies to a dividend paid by a corporation resident in Canada”, to reflect the addition of subsection 90(2) which provides that certain amounts will be deemed to be a dividend in the context of the payment of a dividend by a foreign affiliate. Subsection 90(2) was added by S.C. 2013, c. 34, s. 66(1), generally applicable after August 19, 2011.
¶2.17 (formerly included in ¶2 of IT-67R3) has been modified to clarify the phrase “generally accepted meaning.” It also now reflects interpretative principles outlined in the Supreme Court of Canada decision in Will-Kare Paving & Contracting Ltd. v. Canada (Will-Kare), [2000] 1 SCR 915 — namely that “reference must be given to the broader commercial law to give meaning to words that, outside of the Act, are well-defined.”
¶2.17 has been further modified to reflect the addition of subsection 90(2) to the Act. As previously described, subsection 90(2) was added by S.C. 2013, c. 34, s. 66(1), generally applicable after August 19, 2011.
¶2.17 has also been modified by the removal of the reference to any distribution by a corporation “of its income or capital gains.” This phrase has been deleted to reflect the introduction of a statutory solvency test to the various corporate acts which govern the issuance of dividends. In other words, these solvency tests replace the common law requirement that a corporation must pay dividends out of its profits or net revenues, rather than its capital. Furthermore, ¶2.17 now reflects the notion of corporate intention to pay a dividend.
The comments regarding the treatment of unclaimed dividends formerly included in ¶2 of IT-67R3, have been removed because the topic of unclaimed dividends is addressed in Information Circular IC 71-9R, Unclaimed Dividends.
¶2.18 (formerly included in ¶17 of IT-67R3) has been modified to expand on the concept of a dividend-in-kind.
¶2.20 to 2.23 have been added to describe the amount of a stock dividend as well as the cost of a share received as a stock dividend after April 20, 2015. This latter addition recognizes amendments to subsection 52(3) by S.C. 2016, c. 7, s. 2, applicable to stock dividends received after April 20, 2015, in force on June 22, 2016 (Royal Assent).
¶2.24 (formerly included in ¶6 of IT-67R3) has been expanded to include a reference to the definition of amount in subsection 248(1) and to subsection 52(2). The sentence “A dividend-in-kind will have the same tax treatment as a cash dividend for purposes of the Act” has been added for clarity.
¶2.26 (formerly included in ¶17 of IT-67R3) has been modified to clarify the tax treatment of a deemed dividend. It has also been expanded to provide examples of when a dividend will be deemed under section 84.
¶2.27 has been modified to add a comment to refer the reader to the specific provisions of section 84.1 to determine the application of the provisions in a given situation, in light of introduction of paragraph 84.1(2)(e) to the Act by S.C. 2021, c.21, s.2(1), in force on June 29, 2021 (Royal Assent). A detailed discussion of paragraph 84.1(2)(e) is beyond the scope of this Chapter due to the complexity of the topic.
¶2.28 (formerly included in ¶3 of IT-67R3) has been updated by replacing the reference to former paragraph 89(1)(j) with the current reference to subsection 89(1). Also, the references to subsection 83(1) and to Regulation 2107 have been deleted as they are generally considered to no longer be relevant.
¶2.29 and 2.30 have been added to explain the definition of the term eligible dividend in subsection 89(1), which is used throughout the Chapter.
¶2.31 has been added to provide a definition for the phrase other than an eligible dividend and to explain the term non-eligible dividend that is used throughout the Chapter.
¶2.33 to 2.36 have been added to provide general comments on the concept of integration and its application to the taxation of dividends in Canada.
A Proposed legislative change notice has been added after ¶2.36 to alert readers to a Federal Budget proposal related to substantive CCPCs.
¶2.37 to 2.39 have been added to provide a general description of how a corporation resident in Canada is taxed on taxable dividends.
¶2.40 to 2.44 have been added to provide a general description of how an individual resident in Canada is taxed on taxable dividends. The comments regarding the historic dividend gross-up factor and dividend tax credit rate for dividends received on or before 1987 (formerly ¶10 of IT-67R3) have been removed because they are no longer relevant. Refer to the Act for historic rates.
¶2.45 (formerly included in ¶9 of IT-67R3) has been expanded to comment generally on the impact of the income tax rates of the provinces and territories on the taxation of taxable dividends.
¶2.46 has been added to note the federal government’s practice of adjusting the dividend gross-up factors and the dividend tax credit rates to reflect changes to corporate tax rates.
¶2.47 has been added to provide general comments on the taxation of dividends for tax years before 2006 and the introduction of the eligible dividend regime.
¶2.48 to 2.50 have been added to provide general comments on the taxation of dividends for tax years after 2005 and the introduction of an enhanced dividend gross-up and dividend tax credit mechanism under the eligible dividend regime.
Example 1 (formerly included in ¶15 of IT-67R3) has been updated to reflect the introduction of the eligible dividend rules and to illustrate the application of the dividend gross-up and the dividend tax credit for eligible and non-eligible dividends. For simplicity, Example 1 only illustrates the calculation using federal taxes and credits rather than assuming corporate tax rates and dividend tax credit factors for a hypothetical province or territory, as was the case in the example in IT-67R3.
¶2.51 (formerly included in ¶14 of IT-67R3) has been amended to clarify that the T5 information slip specifies the taxable amount of dividends (including the gross-up amount) and the applicable dividend tax credit. The paragraph is also amended to refer to eligible and non-eligible dividends.
¶2.52 to 2.75 have been added to provide clarity and to comment on the determination and designation of a taxable dividend as an eligible dividend, following the introduction of the eligible dividend regime for tax years after 2005.
¶2.76 to 2.82 have been added to discuss the late eligible dividend designation under subsection 89(14.1) and to comment on the potential circumstances where a late designation will be accepted by the CRA.
A Proposed legislative change notice has been added after ¶2.82 to alert readers to a proposed technical amendment relating to the late designation of a taxable dividend as an eligible dividend.
¶2.83 to 2.92 have been added to comment on the implications for a corporation that designates an amount as an eligible dividend which exceeds the corporation’s capacity to designate an eligible dividend (excessive eligible dividend designations).
¶2.93 to 2.106 have been added to discuss the taxation of an excessive eligible dividend designation under Part III.1.
¶2.107 to 2.114 have been added to comment on the computation of GRIP for a CCPC or a DIC under subsection 89(1), including the tax treatment and impact on GRIP in situations where the dividend recipient is a non-resident shareholder and/or the corporation has specified future tax consequences.
A Proposed legislative change notice has been added after ¶2.109 to alert readers to a Federal Budget proposal related to controlled foreign affiliates.
¶2.115 to 2.119 have been added to comment on the computation of the GRIP addition under subsection 89(7) for a corporation that was a CCPC (or which, without an election under subsection 89(11), would have been a CCPC) throughout its first tax year that includes any part of January 1, 2006.
¶2.120 to 2.123 have been added to comment on the computation of LRIP for a corporation that is not a CCPC or a DIC under subsection 89(1), including the tax treatment and impact on LRIP in situations where the dividend recipient is a non-resident shareholder.
A Proposed legislative change notice has been added after ¶2.122 to alert readers to a Federal Budget proposal related to substantive CCPCs.
¶2.124 to 2.138 have been added to comment on the potential impact and corresponding adjustments to a corporation’s GRIP or LRIP balance that may result from certain changes to the corporation’s status for tax purposes.
¶2.139 to 2.154 have been added to comment on the potential impact and corresponding adjustments to a corporation’s GRIP or LRIP that may result from an amalgamation or winding-up for tax purposes.
¶2.155 (formerly included in ¶16 of IT-67R3) has been modified to remove the reference to non-resident investment corporations under section 133 as this provision is no longer relevant. A general reference to the topic of unclaimed dividends formerly included in ¶16 of IT-67R3 has been added to ¶2.154. This statement has been modified to update the reference to IC 71-9R, Unclaimed Dividends.
This paragraph refers to securities lending arrangements and dividend rental arrangements. However, the discussion of these arrangements formerly included in ¶8 of IT-67R3 has been removed. A detailed discussion of the provisions is beyond the scope of this Chapter due to the increasing complexity of these topics.
The comment regarding the tax on split income rules in section 120.4 has been added to reflect the introduction of these rules to the Act by S.C. 2000, c. 19, s. 30(1), applicable to the 2000 and subsequent tax years.
The comment regarding a tax-deferred cooperative share of an agricultural cooperative corporation under section 135.1 has been added to reflect the addition of this definition to the Act by S.C. 2006, c. 4, s. 80(1), applicable after 2005.
¶2.156 (formerly included in ¶11 of IT-67R3) has been modified to remove the specific reference to dividends received after June 18, 1987 as it applied to subsection 56(4.1) because this restriction is no longer relevant for most taxpayers.
¶2.157 (formerly included in ¶12 of IT-67R3) has been modified to add a reference to Income Tax Folio S1-F4-C1 Basic Personal and Dependant Tax Credits (for 2016 and prior tax years) and Income Tax Folio S1-F4-C2, Basic Personal and Dependant Tax Credits (for 2017 and subsequent tax years) which replace Interpretation Bulletin IT-513R, Personal Tax Credits.