Designation of Eligible Dividends

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The following is now available on the CRA Web site:

2006-12-20

Canadian resident individuals who receive eligible dividends in 2006 and subsequent years will be entitled to a higher gross-up and dividend tax credit. Corporations have to designate each eligible dividend that they pay, and notify shareholders in writing that the dividend is eligible. A corporation must make every effort to notify shareholders of an eligible dividend. The following are general guidelines for corporations to follow.

A. Notification of Shareholders
For the 2006 Year
All Corporations

For 2006, we will accept designations based on identification of eligible dividends on the T3 and T5 slips. Other acceptable methods are posting a notice on the corporation’s website, and in corporate reports or shareholder publications.

For 2007 and Subsequent Taxation Years
Public Corporations

For 2007 and subsequent taxation years, for public corporations, we will accept that notification has been made if, before or at the time the dividends are paid, a designation is made stating that all dividends are eligible dividends unless indicated otherwise. Acceptable methods of making a designation are posting a notice on the corporation’s website, and in corporate quarterly or annual reports or shareholder publications. We will consider that a notice posted on a corporate website is notification that an eligible dividend is paid to shareholders until the notice is removed. Similarly, a notice in an annual or quarterly report that an eligible dividend has been paid is considered valid for that year or quarter, respectively. Alternatively, if a public corporation issues a press release announcing the declaration of a dividend, a statement in the press release indicating that the dividend is an eligible dividend will be sufficient proof that notification was given to each shareholder.

All Other Corporations:

For 2007 and subsequent taxation years, for all corporations other than public corporations, the notification requirements of proposed subsection 89(14) must be met each time a dividend is paid. Examples of notification could include identifying eligible dividends through letters to shareholders and dividend cheque stubs, or where all shareholders are Directors of a corporation, a notation in the Minutes.

Shareholders Whose Mailing Address is Outside the Country

Notification of a designation must be given to all shareholders who receive a dividend, including those whose mailing address is outside the country, and even if Part XIII tax is withheld from the payment. The address of record is not conclusive proof of residency.

A dividend received by a non-resident shareholder cannot qualify as an eligible dividend. If a corporation pays a dividend to a non-resident shareholder that would otherwise be an eligible dividend if paid to a resident shareholder, there is no impact on the eligibility of the dividends paid to other resident shareholders of the corporation.

B. Designation of Portion of Dividend Paid on Class of Shares
All shares of a particular class of shares have the same attributes and therefore, a designation of eligible dividends must include all the shareholders of that class. A designation will not be accepted in respect of the portion of the dividend paid to certain shareholders of a class of shares.

A designation will not be accepted if a corporation designates a fraction of a dividend paid to each shareholder to be an eligible dividend. However, because the legislation is retroactive to dividends paid before the announcement of the new measure, we will allow dividends to be designated as two separate dividends for all dividends paid in 2006. In addition, where a corporation designates two separate dividends, an ineligible dividend and an eligible dividend, these two separate dividends can be paid in one cheque.

C. Dividends Received by Trusts
Trusts will generally not know for some time whether dividends received by them in 2006 are eligible dividends. Where a trust has received from a corporation an amount of dividends paid in 2006 and that corporation has not, before the trust’s deadline for issuing its own T3 slips, notified shareholders (using one or more of the methods described in section A above) of whether the dividends are eligible dividends, then the trust can make reasonable assumptions in determining whether to identify those dividends as eligible dividends. However, the trust accepts responsibility to re-issue proper T3 information slips and T3 returns promptly if the assumption proves to be inaccurate, except for amounts that are less than $100.

Many mutual fund trusts have a December 15 year-end. Dividends received by such trusts in the portion of their 2006 taxation year from December 16 to December 31, 2005, will not qualify as eligible dividends. Such trusts can use a reasonable method to estimate the amount of such dividends, e.g., 1/24 of all dividends received by the trust in its 2006 taxation year. Dividends paid by a corporation in the 2005 calendar year (and, therefore, not eligible dividends) should have been reported by the corporation before the end of February 2006. In filing their T3 returns for 2005, trusts with Dec 15 years-end would be expected to have already determined (as part of filing their 2005 T3 returns) what portion, if any, of such reported dividends paid in 2005 were received in the last two weeks of 2005. These dividends received in the last two weeks of 2005 would have been held-over for reporting in their 2006 T3 returns and the trust would be expected to have a record of these amounts.

D. Dividends Received by Partnerships
Partnership law and the relevant partnership agreement dictate that dividends are allocated to the partners. If the dividends and partners meet the conditions in subsection 89(1) of the Income Tax Act, then a partner’s share of such dividends would be eligible dividends received by that partner. Therefore, each partner’s share of a dividend received by a partnership is considered, for the purposes of all provisions relating to an eligible dividend, to be a dividend received by the partner.

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