Evidence of meeting #55 for Finance in the 39th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was amendment.
A recording is available from Parliament.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
Simply, what does “excessive eligible dividend designation” mean? Could you explain it in the context of what you're trying to capture here?
Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
Sure. Under the new dual rate dividend tax credit proposals that are included in this bill, dividends may be eligible for a higher rate of dividend tax credit in the hands of the individual shareholder, if those dividends are paid out of income that was subject to the high rate of corporate income tax.
Now, a shareholder doesn't need to go and find out from the corporation whether or not the dividend is paid out of income subject to the high rate of corporate income tax. The corporation will tell the shareholder by designating that dividend.
It may be possible, however, for a corporation to designate a greater amount of dividends as being eligible for the high-rate dividend tax credit than are actually eligible. If that's the case, then that corporation would have an excessive dividend designation.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
So if I'm a shareholder and I have received this designation that this is an excessive eligible dividend, my credit is therefore higher?
Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
No. You would receive a designation that you have an eligible dividend--that is, that the dividend is eligible for the high-rate tax credit.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
And who chooses whether I get the higher rate or the lower rate of that credit?
Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
The corporation would be the one to designate whether the credit was paid out of high-rate income or out of low-rate income. It's the corporation that designates the dividend.
If the corporation designates too much dividend, it's the corporation that would have an excessive eligible dividend designation.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
So where does that shift the tax burden--onto the shareholder or onto the corporation? If in fact the corporation chooses to have an excessive eligible dividend, where is the tax burden being shifted--to the corporation or the shareholder?
Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
The shareholder would see no impact as a result of that. They would continue to claim their dividend tax credit as if the dividend actually were eligible as a high-rate dividend. The corporation would have to pay a special charge--which is also included in this bill--to make up the difference.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
Why would the corporation do that? What would be the point of doing that?
December 5th, 2006 / 11:15 a.m.
Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
It could be an error. It could be—
In the absence of some measure to stop you from doing that, it would be a way to generate excessive dividend tax credit to shareholders. You have to have some mechanism to ensure that a corporation doesn't designate dividends as eligible dividends when it doesn't have the—
Liberal
John McKay Liberal Scarborough—Guildwood, ON
I'm having trouble following the benefit here, though. Where is the tax benefit going? If it's not going to the shareholder, it has to be going to the corporation. If it's going to the corporation, then it has to have some good reason for doing that. What's the good reason for doing that?
Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
There would be a tax benefit to the shareholder in having an eligible dividend. You'd get a higher dividend tax credit, so that would—
Liberal
John McKay Liberal Scarborough—Guildwood, ON
So that's where the tax benefit goes--ultimately to the shareholder.
Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
The tax benefit ultimately goes to the shareholder. It would be in a corporation's interest to ensure that their shareholders get the maximum tax benefits and that they designate the maximum that they can as eligible dividends.
In the absence of some mechanism to stop them from doing so, they might designate even more than they were eligible for, and that's what this is about. This is to calculate any excessive dividend designation that may have been made in order to ensure that the corporation then has to pay up an amount to reflect the additional cost of the higher-rate dividend tax credit being claimed, or claimable, by the shareholder.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
I can see my colleagues are fascinated by this. It actually is quite interesting, because—
Conservative
The Chair Conservative Brian Pallister
Just for clarification, this is in part to prevent corporations, for whatever reason, from paying excess dividends out in a year beyond what they made that year to create a competitive advantage to themselves or to attract further investment to their company. Is that—
Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
It's to prevent them from over-designating their dividends as being dividends eligible for the high-rate dividend tax credit.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
If a corporation is being prevented from doing this.... What I'm driving at here is how do the activities of the corporation affect the credit of the shareholder?
Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
If the corporation designates the dividend as an eligible dividend, the shareholder will get a greater dividend tax credit.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
As just simply an eligible one. But if it's an excessive one, the shareholder doesn't get that benefit?
Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
Suppose a corporation had the ability to pay dividends out of income that was taxable at the high rate of $1 million, but they had some other sources of income taxable at the low rate. They actually would have the capability of paying a $1.5 million dividend. Under these rules they should pay a half-million-dollar dividend as a regular dividend that is eligible for the low-rate tax credit, and they would have $1 million that they could pay as a dividend eligible for the high-rate dividend tax credit.
But it may be that they designate the whole thing as eligible for the high-rate dividend tax credit. Maybe it's a mistake, or maybe it's otherwise. If they do so, the shareholder will be eligible for the high-rate dividend tax credit. They don't have to look behind what the corporation has told them.
In this circumstance, the corporation would have had an excessive eligible dividend designation of a half million dollars because they designated half a million dollars too much, and they would have to pay a charge to offset the fact that the shareholder is getting a higher dividend tax credit on that dividend than is warranted.
Director, Tax Legislation Division, Tax Policy Branch, Department of Finance
This whole part 2 of the bill is new, to implement the dual rate dividend tax credit that was originally proposed a year ago November and was included in the 2006 budget.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
Refresh my mind. Was this to do some equalization among corporations? Pull me to back to November 2005 and point me to where that issue came up.