Deemed Dividends

DEEMED DIVIDENDS

can elect to have deemed dividend paid from capital dividend account by making 83(2) election resulting in no taxes may still elect if corporation has deemed dividend so as to transfer the Capital Dividend Account amount to the parent corporation

if individuals receive deemed dividends:

LRIP (lower rate income pool) from CCPC small business deduction plus investment income subject to integrations
Gross up 25% $1,000 x 1.25 = $1,250
FDTC $167 [either 2/3 of gross up 1250 or 13.3333% of $1250]

GRIP (greater rate income pool) from CCPC active business income >$500,000 and all public corporation incomes
Gross up 44% $1,000 x 1.44 = $1,440
Federal dividend tax credit (FDTC) $259 [10/17 of gross up 440 or 17.97% of $1440] (note typo in CGA notes; should be 10/17 and not 11/18 in 2010)
Gross up % will decrease as corporate tax rates continue to be reduced
84(1) Artificial Increase in PUC

Liz 50 shares $5,000 + 50 shares = 100 shares
Rafael 50 shares 5,000 = 50 shares 100 shares $10,000 total = 150 shares

Liz exchanges property FMV$20,000 for shares with FMV and legal PUC of $30,000. ACB of property = $15,000.

Tax consequences:

84(1) deemed dividend:
Increase in PUC $30,000
Increase in net assets (20,000)
Deemed dividend $10,000
Liz’s share 100/150 shares x $10,000 = $6,667
Rafael’s share 50/150 shares x $10,000 = $3,333

15(1) taxable benefit:
FMV shares received $30,000
FMV of property (20,000) 10,000
Less deemed dividend 84(1) (10,000) Zero
ACB of shares of corporation:
53(1)(b) Adjustments to ACB: increase ACB by amount of 84(1) deemed dividend
[draft legislation to be effective Nov 9, 2006: exception if corporation received dividend and deducts it under s112, and increase in PUC arose as a result of conversion of contributed surplus to PUC; no increase in ACB as dividend not taxable because of deduction (eg. Directors’ arbitrarily increase PUC by $1 million;