Relief for Eligible Dividends

“These new rules should generally provide greater flexibility.”

Since the introduction of the eligible dividend rules in 2006, taxpayers have been challenged by the administrative burden that accompanies eligible dividend designations.  In its 2012 Budget, the Federal Government has introduced new rules which address some of these challenges. In general terms, the eligible dividend rules were introduced to improve the integration of tax between the corporate and shareholder levels for high corporate rate income through an enhanced dividend tax credit with respect to eligible dividends.

Under existing law, a corporation paying an eligible dividend must designate an entire dividend as such by notifying each shareholder in writing, at the time the eligible dividend is paid, that the dividend has been designated as an eligible dividend. On this basis it is currently not possible to designate only part of a dividend as an eligible dividend.  Furthermore, under the current rules, it is not possible for a corporation to make a late designation of an eligible dividend.

The 2012 Federal Budget proposes two relieving provisions, effective for dividends paid after March 28, 2012:

  1. That the Minister of National Revenue (the “Minister”) has discretion to accept a late designation of a dividend as an eligible dividend, where it would be just and equitable in the circumstances to do so, if the designation is filed within three years after the day on which the designation was required to be made. The proposed rules will deem the late designation to have been made at the time the designation was required to be made.Note that the Minister has discretion as to whether to accept the late designation or not and there is  a three year deadline.
  2. To allow a corporation to designate, at the time it pays a taxable dividend, any portion of the dividend to be an eligible dividend.

The application process for obtaining the Minister’s consent for late designations is as yet unclear.  However, these new rules should generally provide greater flexibility and improve tax fairness with respect to the designation of dividends as eligible dividends.

If you require further information regarding these proposed rules, please contact a member of the Tax Specialist Group.

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.

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Cadesky Tax