Principal Issues: (a) Would the CRA accept in certain circumstances a late election under subsection 220(3.2) to convert an excess dividend into a taxable dividend by virtue of subsection 184(3)?
(b) If the answer is yes, would the CRA also agree to waive the penalty under subsection 220(3.5)?
(c) Are there alternative measures to avoid taxpayer uncertainty as to whether the subsection 184(3) election can be made following an objection?
Position: No.
Reasons: General comments.
FEDERAL TAX ROUNDTABLE
APFF CONFERENCE 2010
Question 47
Unfairness resulting from a dispute with the CRA concerning the amount of capital dividend account:
Where a corporation has a capital dividend account, it may pay a tax-free capital dividend to its shareholder(s) by making an election under subsection 83(2).
At a subsequent time, if the corporation is audited by the CRA and the calculation of the corporation's capital dividend account is changed downward, a notice of assessment will be issued in the corporation's name under subsection 184(2), claiming an additional tax of 50% of the excess dividend.
A problem arises where the corporation disagrees with the adjustment to the amount of its capital dividend account shown on the notice and wishes to contest the assessment.
Indeed, the Act provides that the corporation has only 90 days to choose one of the following alternatives:
- make an election under subsection 184(3) and convert the excess dividend into a taxable dividend;
- file a notice of objection to contest the assessment and calculation of its capital dividend account balance.
Here are some of the injustices that can result:
- if the corporation does not make the election, the additional tax under subsection 184(2) will be maintained if it should be unsuccessful in its challenge;
- on the other hand, if the corporation elects under subsection 184(3), the excess dividend will become taxable. Under no circumstances may the corporation reconvert the excess dividend into a capital dividend. The shareholders of the corporation will therefore have been taxed on the excess dividend as a dividend even if it ultimately succeeds in its objection;
- There is uncertainty as to the ability to make a late election under subsection 220(3.2) when the objection is settled and a potential penalty under subsection 220(3.5).
A question was posed to the CRA at an earlier Roundtable (footnote 1) as to whether the CRA would automatically accept the filing of a late election under subsection 220(3.2) in that particular case. In its response, the CRA referred to Information Circular IC07-1 (footnote 2).
A request under subsection 220(3.2) is indeed provided for in ITR section 600 for the filing of a late election under subsection 184(3), as confirmed by IC07-1. On the other hand, it seems that that request can only be accepted in certain situations set out in the Information Circular, notably in paragraph 56:
Circumstances where a request may be accepted include:
"[...] There have been tax consequences not intended by the taxpayer, and there is evidence that the taxpayer took reasonable steps to comply with the law. [...]
In the event that:
- a corporation proceeds with the calculation of its capital dividend account.
- that corporation is assessed by virtue of 184(2) in respect of an excess dividend following an audit of the calculation of its capital dividend account;
- the corporation files a notice of objection to the assessment;
- the notice of objection is filed in good faith;
- the corporation is ultimately unsuccessful and the assessment previously made is maintained.
Questions to the CRA
(a) Can the CRA confirm that this is a situation where “[t]here have been tax consequences not intended by the taxpayer, and there is evidence that the taxpayer took reasonable steps to comply with the law” and CRA could accept a late election under subsection 220(3.2) to convert the excess dividend into a taxable dividend under subsection 184(3)?
(b) If the answer is yes, would the CRA otherwise agree to waive the penalty under subsection 220(3.5)?
(c) Can the CRA confirm whether alternative measures are in place to prevent a taxpayer from being uncertain as to being able to make the subsection 184(3) election following the objection?
CRA Response
Any taxpayer may apply to the CRA for relief pursuant to the provisions of subsection 220(3.1) or (3.2), i.e., to waive or cancel penalties or interest payable by the taxpayer, or to extend the time prescribed for the filing of certain elections by the taxpayer or to allow the taxpayer to amend or cancel an election previously made.
However, the Minister is not required to provide such relief under subsections 220(3.1) and (3.2), and it is not the CRA's policy to automatically waive penalties or accept a request for an extension of time or a request to revoke an election by virtue of subsections 220(3.1) and (3.2). Each request is reviewed and decided on the basis of the particular facts of a particular case, including to avoid retroactive tax planning.
However, Information Circular IC 07 - 1, Taxpayer Relief Provisions, provides information on the discretionary authority accorded to the Minister under the Act, explains how to apply for relief, and outlines the administrative guidelines that the CRA will follow in making a decision in a particular situation.
Given that the statement in this question only briefly describes a particular hypothetical situation and that the process of reviewing a claim is the responsibility of certain designated officials of the CRA, it is impossible for us to determine what the final decision of those officials would be in a situation such as the hypothetical situation. However, as a matter of first impression, it cannot be assumed that a request for an extension of time under subsection 220(3.2) to file an election under subsection 184(3) would necessarily be denied in a particular situation similar to the given hypothetical situation.
Isabelle Landry
(450) 623-0193
October 8, 2010
2010-037326.
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Technical Interpretation No. 2008-028513, October 10, 2008.
2 CANADA REVENUE AGENCY, Information Circular IC07-1, "Taxpayer Relief Provisions," May 31, 2007.