Principal Issues: In a situation where a corporation is the beneficiary of a trust and where that trust receives a capital dividend in its taxation year, pays an amount with respect to that capital dividend to the corporate beneficiary during that taxation year and designates the amount in respect of the corporate beneficiary pursuant to subsection 104(20), when does the corporate beneficiary add, in its capital dividend account, the amount received from the trust and designated under subsection 104(20)?
Position: The amount designated by the trust in respect of the corporate beneficiary under subsection 104(20), and that was paid to that beneficiary at or before the end of the trust's taxation year, can be added to the corporation's capital dividend account at the end of the trust's taxation year.
Reasons: Before the end of the trust's taxation year, the condition requiring that the trust be resident in Canada throughout its taxation year during which the trust received a capital dividend would not be met. Furthermore, the trust cannot designate an amount under subsection 104(20) before the end of the year.
XXXXXXXXXX 2010-035847 Sylvie Labarre, CA May 3, 2010
Dear Madam,
Subject: Capital Dividend Account
This is in response to your email of February 24, 2010, in which you asked our opinion as to when an amount should be added to a corporation's capital dividend account pursuant to paragraph (g) of the definition "capital dividend account" in subsection 89(1) of the Income Tax Act (the "Act").
Unless otherwise indicated, any legislative reference in this document is to a provision of the Act.
Paragraph (g) of the definition "capital dividend account", as amended by the legislative proposals in former Bill C-10 of October 29, 2007, provides for the inclusion, in the capital dividend account of the
"total of … all amounts each of which is an amount in respect of a distribution made by a trust to the corporation in the period in respect of a dividend (other than a taxable dividend) paid on a share of the capital stock of another corporation resident in Canada to the trust during a taxation year of the trust throughout which the trust was resident in Canada equal to the lesser of
(i) the amount of the distribution, and
(ii) the amount designated under subsection 104(20) by the trust in respect of the corporation in respect of that dividend,
... "
Subsection 104(20) provides that the distribution by the trust must be designated by the trust in the return of the trust’s income for the taxation year in which it received the capital dividend.
You wish to know when the amount distributed by the trust to the beneficiary corporation should be considered in computing the capital dividend account: as soon as the corporation receives the amount; or only on December 31 (in the case of an inter vivos trust) of the year in which the trust made such a distribution.
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 ("CRA") not to issue written opinions regarding proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that 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 which may be helpful to you. These comments, however, may not apply to your particular situation in certain circumstances.
Based on our understanding of your question, the amount of the capital dividend received by the trust and designated by the trust to the corporate beneficiary under subsection 104(20) would have already been paid before that designation to that corporation.
We are of the view that the amount in respect of a distribution made by the trust to the corporation in the period in respect of a dividend (other than a taxable dividend) paid on a share of the capital stock of another corporation resident in Canada to the trust during a taxation year of the trust throughout which the trust was resident in Canada, would be added to the capital dividend account, pursuant to paragraph (g) of the definition "capital dividend account" in subsection 89(1), at the end of the trust's taxation year if the amount was designated to the corporation under subsection 104(20) and the amount was paid to the corporation at or before that time.
If the amount had been paid before the end of the trust's year, we are of the view that when the amount was received by the beneficiary corporation, we would not know whether the trust satisfied the condition that it had been resident in Canada throughout its taxation year. In addition, there would be no amount designated by the trust in respect of the dividend before the end of its taxation year since the designation is made in its income tax return filed for the taxation year in which it received the capital dividend.
These comments are not advance income tax rulings and are not binding on the CRA in respect of any particular situation.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.