Eligible Dividends - Split-Dividend Designation and Late Designation
Since the taxation of dividends was significantly changed by the introduction of the “eligible dividend” concept, effective for dividends paid after 2005, it has been clear that these rules required modification to deal with practical problems. Specifically, pursuant to subsection 89(14), which provides that a corporation designates a dividend to be an eligible dividend by notifying the dividend recipient in writing at the time the dividend is paid, there is no ability to (i) designate a dividend as being an “eligible dividend” after it is paid, or (ii) designate only part of a dividend as an “eligible dividend”. Allowing for late designations seemed to be a reasonable request on the part of taxpayers, due to timing issues that often arise in the calculation of “general rate income pool” (“GRIP”) under subsection 89(1) (for example, with respect to changes in the GRIP balance arising from a reassessment). Furthermore, requiring a second set of corporate resolutions to declare and pay eligible dividends, in addition to the documentation required for dividends not designated as eligible dividends, often resulted in little more than additional paperwork for the dividend payer.
In spite of requests for administrative relief from the CRA with respect to the strict application of subsection 89(14) (see, for example, Income Tax Technical News No. 41, and CRA Document No. 2010-0387541E5, “Designation of Eligible Dividends”, January 10, 2011), none was forthcoming. Accordingly, changes proposed to subsection 89(14) are contained in Budget 2012 to deal with these concerns.
Specifically, Budget 2012 amends the legislation to provide that a portion of a taxable dividend received by a person after 2005 can be designated as an eligible dividend. However, the legislation is not retroactive. The Notice of Ways and Means Motion provides that the ability to designate partial eligible dividends is limited to dividends paid on or after March 29, 2012.
In addition, newly proposed subsection 89(14.1) will allow for a late designation of an eligible dividend where, in the opinion of the CRA, “the circumstances of a case are such that it would be just and equitable to permit a designation”. The late designation must be made within three years after the day it should have been made, being the time that the dividend was paid. Again, the Budget 2012 measures apply only to dividends paid on or after March 29, 2012. It is expected that the CRA will release some guidance on what circumstances it will consider “just and equitable” for these purposes.