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Designation of Eligible Dividends - 2006/2007

Subject: Eligible Dividends Number: 06-36 Date: 12/29/2006

CRA gives guidance on 2006 and 2007 eligible dividend designations

The CRA recently released some guidance for the 2006 and subsequent taxation years for eligible dividends. The key points are as follows:

1. In 2006, the CRA will accept eligible dividend designations based only on the identification of eligible dividends on T3 and T5 slips

2. For 2007, and subsequent taxation years, appropriate notification includes identifying eligible dividends through letters to shareholders, dividend cheque stubs or a notation in the minutes where all the shareholders are directors of corporations.

3. For 2006, an eligible dividend can be designated as part of a dividend paid. That is, if $10,000 of dividends are paid, a corporation can designate $6,000 of those dividends to be eligible dividends. For 2007 and subsequent years, a designation will not be accepted in respect of a portion of dividends paid. Instead, all of a dividend payment must be designated as an eligible dividend.

4. The CRA acknowledges that for 2006, a trust may not be aware of the exact amount of eligible dividends received as a trust may be waiting for mutual funds slips which are issued at the same time as the trust must complete its trust return. The CRA has said that the trust can make “reasonable assumptions” in determining whether to identify dividends as eligible dividends. However, the CRA goes on to say that the trust must amend the T3 slips and return if the assumption is inaccurate except for amounts that are less than $100.

5. Any dividends paid to a class of shares must all be designated as eligible dividends. That is, a corporation cannot designate eligible dividends to certain shareholders and ineligible dividends to other shareholders where they all own the same class of shares.

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