An estate owns all the shares of Corporation A, which has a capital dividend account (CDA) and refundable dividend tax on hand account (RDTOH) but owns no assets. The estate sells its shares to Corporation X, which has assets but not CDA or RDTOH - following which Corporation A and Corporation X amalgamate, with the amalgamating corporation paying a capital dividend to Corporation X. One of the main purposes of these transactions was to allow Corporation X to benefit from Corporation A's CDA and RDTOH
In discussing whether s. 83(2.1) would apply in the context of there having been an amalgamation, CRA first stated:
[P]aragraph 87(2)(z.1) provides a special rule where subsection 83(2.1) would apply to a predecessor corporation if a dividend were paid by it immediately before the amalgamation and an election under subsection 83(2) were made in respect of the full amount of that dividend. Where a portion of the dividend would be deemed to be a taxable dividend paid by the predecessor corporation under subsection 83(2.1), the CDA of the predecessor corporation is not transferred to the amalgamated corporation.
CRA noted that it would thus be necessary to determine whether all or substantially all of Corporation A's CDA, immediately before the payment of such a dividend, could reasonably be considered to consist of amounts not described in paras. (a) to (e) of subsection 83(2.4). In particular, there was insufficient information to determine if any part of the CDA of Corporation A represented an amount of CDA realized by a corporation before it became related to Corporation X.