Principal Issues: Can a corporation, which is in receipt of a non-taxable windfall, distribute it tax-free to its shareholder?
Position: No
Reasons: It is unlikely that a corporation is in receipt of a non-taxable windfall. With the exception of dividends paid from the capital dividend account, the receipt of a dividend is subject to tax.
XXXXXXXXXX 2011-039495 A. Townsend July 11, 2011
Dear XXXXXXXXXX :
Re : Receipt of Non-taxable Windfall
I am writing in response to your letter of February 1, 2011 asking how a corporation that is in receipt of a non-taxable windfall payment can distribute the funds on a tax-free basis to its shareholders.
Written confirmation of the tax implications inherent in a particular transaction is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer, therefore, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments that may be of assistance.
We have not been provided with any details or documentation concerning the amount you are referring to as a non-taxable windfall payment received by the corporation. In general terms, we are of the opinion that it is unlikely that a corporation could be in receipt of a non-taxable windfall. An amount received on account of income by a corporation would normally be included in its business or property income. Alternatively, if an amount is received on account of capital, it would generally be included in income pursuant to section 14 (eligible capital amount) or section 38 (taxable capital gain).
A corporation is a separate legal entity from its shareholders and usually distributes its surplus to its shareholders through the payments of dividends. A dividend received by a shareholder is usually taxable unless it was paid by the corporation from its capital dividend account.
I trust the foregoing is of assistance.
Yours truly,
Guy Goulet CA, M.Fisc.
Manager
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch