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Subject: CCPC Status Number: 11-03 Date: 1/28/2011

It may save time and effort for such a CCPC to be treated as a non-CCPC

Since the eligible dividend rules were introduced, effective January 1, 2006, they have remained quite complicated.

For example, subsection 89(11) enables a corporation to file an election to deem an otherwise Canadian Controlled Private Corporation (“CCPC”) to not be a CCPC at any time in the year for which the election is filed and all subsequent years, until a revocation is filed.

So why would practitioners consider recommending a subsection 89(11) election for some of their CCPC clients? Well, the most practical answer to that question might be that certain CCPCs are not eligible for the small business deduction. Perhaps they are part of an associated group that has used the small business deduction already or their taxable capital is too high.

Given the complexity of the calculations to track the general rate income pool (“GRIP”), it may save time and effort for such a CCPC to be treated as a non-CCPC. No GRIP calculation will be required as any dividend paid by a non-CCPC is considered to be an eligible dividend (to the extent that the company does not have a positive balance in its low rate income pool (“LRIP”)). Overly simplified, a non-CCPC’s LRIP balance is the portion of the corporation’s accumulated after tax earnings from income subject to preferential tax treatment (like previous access to the small business deduction).

One must carefully consider the implications of making a subsection 89(11) election. For example, the corporation will have to calculate an opening LRIP balance which is not an easy calculation to make. To the extent that the opening balance of the LRIP is a positive number, any future dividends paid by the corporation will first need to be paid out of its LRIP pool (which will result in such balance being treated as a non-eligible dividend). Only to the extent the dividends paid exceed the LRIP pool will they be treated as an eligible dividend.

To the extent a CCPC is expecting to realize a capital gain, and to the extent that the opening LRIP balance would be nominal, an election under subsection 89(11) may be worthwhile. In certain circumstances, the sale, combined with the subsection 89(11) election, may enable the after-tax gain to be distributed as an eligible dividend. One must closely look at the opening LRIP calculations, the timing of the sale, when the cash will be removed and other matters in order to ensure that eligible dividend treatment is available.

Members of the Tax Specialist Group would be pleased to discuss the above matters with you further.

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