CRA comments on late eligible dividend designations

The Canadian tax system generally seeks to eliminate double tax in respect of dividends to Canadian individuals out of corporate income that was subject to either the “small business rate” or the “general rate” of corporate tax. This is achieved through a “gross-up” and “dividend tax credit” mechanism (s. 82 and s. 121 respectively). In order to eliminate such double taxation in respect of corporate income subject to the general rate, the applicable dividends must be “designated” by the paying corporation as “eligible dividends”. The designation is made by notifying the shareholders at the time the dividend is paid (s. 89(14)). A “late designation” is possible under s. 89(14.1), but only if the corporation makes the designation within the 3 years of the dividend and the CRA is of the opinion that accepting the late designation would be “just and equitable”. In 2012-0445661C6, the CRA said that a late designation might be accepted where, for example, a public corporation (Pubco) received a dividend from its subsidiary (Subco) and Subco inadvertently did not designate the dividend as an eligible dividend to Pubco. The absence of a timely designation would mean the creation of a low rate income pool (LRIP) balance at the Pubco level, even though all of the underlying income in Subco was clearly taxed at the general rate. The CRA further commented that a late designation would not be permitted in situations where a corporation deliberately or on a regular basis makes late eligible dividend designations.