Principal Issues: On July 16, 2010, the Department of Finance proposed to amend clause 89(1)(a)(i)(A) of the CDA definition to add the expression "computed without reference to subparagraphs 52(3)(a)(ii) and 53(1)(b)(ii)" after "the amount of the corporation's capital gain".
After an increase in the stated capital of shares, the shares are disposed of and a capital gain results from the disposition. Will the proposed amendment to the definition of CDA be applicable in that situation?
Position: It depends on the facts. In a situation where subsection 55(2) did not apply when the stated capital of shares was increased and where proposed subparagraph 53(1)(b)(ii) applied to decrease the amount computed pursuant to subparagraph 53(1)(b)(i), the proposed amendment to clause 89(1)(a)(i)(A) of the CDA definition would apply to change the amount of the capital gain used for the purpose of computing the CDA. However, the amount of the deemed dividend under subsection 84(1) that would be subject to paragraph 55(2)(a), would be deemed not to have been a dividend received by the corporation, and thus would not be included in the amount described in proposed paragraph 53(1)(b)(i) or (ii). Consequently, the proposed amendment to clause 89(1)(a)(i)(A) of the CDA definition would not apply in such a situation.
Reasons: Wording of the proposed amendment.
XXXXXXXXXX 2011-042114 Sylvie Labarre, CA October 14, 2011
Dear Sir,
Subject: Capital dividend account
This is in response to your email of September 14, 2011 in which you asked us if a proposed change to the definition of the capital dividend account ("CDA") would apply in the circumstances you described to us.
Your question arises in the context of an increase in paid-up capital that would result in the taxation of a capital gain under subsection 55(2) of the Income Tax Act (the “Act").
Unless otherwise indicated, any statutory reference is to a provision of the Act.
The proposed change to the definition of the CDA is specified in clause 89(1)(a)(i)(A) of that definition. The Department of Finance proposed that amendment on July 16, 2010.
It reads as follows:
(A) the amount of the corporation’s capital gain — computed without reference to subparagraphs 52(3)(a)(ii) and 53(1)(b)(ii) — from the disposition (other than a disposition that is the making of a gift after December 8, 1997 that is not a gift described in subsection 110.1(1)) of a property in the period beginning at the beginning of its first taxation year that began after the corporation last became a private corporation and that ended after 1971 and ending immediately before the particular time (in this definition referred to as “the period”)
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, the determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
In your request, you refer to Technical Interpretation 2011-0415891E5 dated August 31, 2011 and some excerpts from comments in that document. We would like to point out that this letter contained comments about situations in which subsection 55(2) did not apply in addition to comments about the situation you are concerned about. Some general comments of that technical interpretation may therefore not be relevant to all of the situations listed in that document.
You asked us to assume that the dividend calculated pursuant to subsection 84(1), or a portion of it, would be deemed not to be a dividend by virtue of paragraph 55(2)(a). Our comments will therefore be made taking into account that assumption. However, even though we are commenting here on that assumption, it does not mean that we are deciding on the accuracy of that assumption in this or another situation.
Under that assumption, the amount of the deemed dividend received by virtue of subsection 84(1), to which paragraph 55(2)(a) applies, would be deemed not to be a dividend received by the corporation and would therefore not be a portion of the amount described in subparagraph 53(1)(b)(i), as proposed on July 16, 2010. Given that subparagraph 53(1)(b)(ii), as proposed on July 16, 2010, refers to "the portion of the total determined under subparagraph (i) that relates to dividends" and since the amount of the dividend deemed not to be a dividend under paragraph 55(2)(a) is not part of the total determined under subparagraph 53(1)(b)(i), that amount would also not be affected by subparagraph 53(1)(b)(ii). Thus, the proposed amendment to the CDA definition in subsection 89(1) to add the expression "computed without reference to subparagraphs 52(3)(a)(ii) and 53(1)(b)(ii)”, would have no impact when calculating the CDA of a corporation in such a situation.
Based on the foregoing, but subject to the application of subsection 245(2) in certain circumstances, the CDA would generally be increased by the non-taxable portion of the capital gain that was included in computing the corporation's income under subsection 55(2).
On the other hand, for situations where it was determined that subsection 55(2) would not apply (for example, because the purpose test would not be satisfied or because the exceptions in subsection 55(3) were applicable), the increase in the adjusted cost base provided for in paragraph 53(1)(b) may be limited by virtue of subparagraph 53(1)(b)(ii), as proposed by the Department of Finance on July 16, 2010. If that were the case, the potential disposition of the shares could result in an additional capital gain over the gain that would have been calculated if the amendment under subparagraph 53(1)(b)(ii) had not been proposed or never adopted. However, under the proposed amendment to the CDA definition, the capital gain should be recalculated for the purposes of calculating the CDA as if the decrease in the adjusted cost base referred to in subparagraph 53(1)(b)(ii) (as proposed) had not been made. That would mean that for the purpose of calculating the CDA, the capital gain added to clause 89(1)(a)(i)(A) of the CDA definition would be less than the capital gain computed for the purposes of the application of section 39.
These comments are not advance income tax rulings and are not binding on the CRA with respect to a particular situation.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
for the Director
Corporate Reorganization and resource industry Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch