Principal Issues: Where a corporation elected under subsection 83(2) in respect of a full amount of a dividend, would the part of the dividend that exceeds the CDA immediately before the dividend became payable reduce the CDA of the dividend payer after the dividend became payable?
Position: No.
Reasons: Wording of paragraph 83(2)(a) and of the definition of CDA in subsection 89(1).
XXXXXXXXXX 2011-041751 Sylvie Labarre, CA August 25, 2011
Dear Madam,
Subject: Dividend in excess of capital dividend account ("CDA")
This is in response to your email of August 16, 2011 in which you asked us for our interpretation of an element of the CDA definition in subsection 89(1) of the Income Tax Act (the “Act”).
Unless otherwise indicated, any statutory reference is to a provision of the Act.
Your request was made in the following context. A private corporation made an election under subsection 83(2) in respect of a dividend. The amount of the dividend under that election exceeded the CDA as defined in subsection 89(1) and the corporation paid Part III tax in accordance with subsection 184(2).
To reach a conclusion, you analyzed the wording of subsections 83(2) and 184(2). You specifically considered paragraph 83(2)(a), which reads as follows:
(a) the dividend shall be deemed to be a capital dividend to the extent of the corporation’s capital dividend account immediately before the particular time;
In those circumstances, you noted that, under subsection 184(2), Part III tax is calculated as 3/4 of the amount, if any, that the "full amount of the dividend exceeds the portion thereof deemed”, under subsection 83(2), "to be a capital dividend".
Based on that analysis, you concluded that, in the context described above, there would be no reduction in the subsequent computation of the CDA of the corporation paying the dividend for the portion of the dividend exceeding the CDA in an election made by virtue of subsection 83(2).
You wish to know if we agree with your conclusion.
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.
Under the definition of CDA in subsection 89(1), the CDA must be reduced by the "total of all capital dividends that became payable by the corporation after the commencement of the period and before the particular time”.
It is subsection 83(2) that determines the capital dividend. As you stated, the wording of subsection 83(2) ensures that the portion of the dividend covered by an election pursuant to subsection 83(2) that exceeds the CDA immediately before the time the dividend becomes payable, is not deemed to be a capital dividend. Thus, that portion would not be considered as part of the amount described in the preceding paragraph. We therefore agree with your conclusion that, in the context noted above, the excess portion of the dividend would not reduce the subsequently-computed CDA of the corporation that paid the dividend.
Furthermore, subject to an election under subsection 184(3), paragraph 83(2)(b) results in no part of a dividend that is the subject of an election made under subsection 83(2) being included in computing the income of any shareholder. As a result of that paragraph and the wording of paragraph (b) of CDA's definition in subsection 89(1), any corporate shareholder would add to its CDA the entire dividend designated under the subsection 83(2) election (including the excess of the dividend on the capital dividend), provided that the dividend payor has not made an election pursuant to subsection 184(3).
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 Reorganizations and Resource Industry Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch