Principal Issues: In a case where a corporate taxpayer has made an excessive capital dividend election and, technically, is unable to make the election under subsection 184(3) because one of the requirements under subsection 184(4) cannot be met as one of the dividend recipients, a corporation, has since been dissolved, whether (1) the CRA would accept administratively that the election under subsection 184(3) be made if the directors of the dividend recipient corporation in office at the time the dissolution gave their consent in place of the dissolved corporation and (2) if the answer to question 1 is negative, the CRA would request from the department of Finance that the law be changed to permit a corporation in such a situation to be able to make the election under subsection 184(3).
Position: (1) and (2) No.
Reasons: In such cases, the corporate taxpayer can make a request under subsection 220(3.2) that the minister cancels the taxpayer's capital dividend election under subsection 83(2).
XXXXXXXXXX 2007-022047 Marc LeBlond April 21, 2008
Dear Sir,
Subject: Request for a technical interpretation of section 184 of the Income Tax Act.
This is in response to your email of January 15, 2007 in which you requested our comments on the above subject matter in relation to the particular situation described below. We apologize for the delay in responding to your request.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
It appears to us that the situation described in your letter and summarized below may be an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments that may be helpful. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all the facts relating to a particular situation. Accordingly, and given that your letter only briefly describes a particular hypothetical situation, the comments we make below may not be fully applicable in a particular situation.
Particular Situation
- A private corporation ("Corporation") paid a capital dividend in 2007 pursuant to subsection 83(2) to its two shareholders, each of whom held 50% of the Corporation's shares.
- One of the shareholder corporations was dissolved in 2008 ("SC").
- In 2009, the Canada Revenue Agency revised the "capital dividend account" ("CDA"), as defined in subsection 89(1), of the Corporation downwards. This resulted in the dividend paid in 2007 exceeding the revised CDA balance. The Corporation is therefore subject to a tax equal to 75% (60% based on proposed legislative changes) of the excess dividend pursuant to subsection 184(2).
- SC did not pay a capital dividend pursuant to subsection 83(2) in 2007.
Your questions and positions
You asked whether, in the particular situation, the corporation could make the subsection 184(3) election, notwithstanding the fact that SC was dissolved, given that, technically, for such an election to be validly made, each of the shareholders of the corporation that received a capital dividend must concur with the election pursuant to subsection 184(4). Furthermore, you asked whether our answer to that question would be the same if, in the particular situation presented, SC were a "cooperative corporation" as defined in subsection 136(2).
Finally, if we are of the view that a subsection 184(3) election is not available to the Corporation in the particular situation, you asked whether we are prepared to recommend to the Department of Finance that the Act be amended to allow for a subsection 184(3) election in such situations.
In your view, it would not be appropriate in the particular situation presented that the Corporation could not make the subsection 184(3) election simply because SC is dissolved. Indeed, you are essentially arguing that, if the legal existence of SC were restored, SC could make the subsection 184(3) election and the taxable dividend that would be deemed to be received by SC would not result in any tax payable by SC. You are also of the view that, in the particular situation presented, the corporation should be able to make the subsection 184(3) election without the need to re-establish the legal existence of SC in order to obtain its concurrence, provided that the directors in place at the time of the dissolution of SC concur in lieu of the dissolved corporation. You believe that the same treatment should be accorded in a situation where the SC is a "cooperative corporation" as defined in section 136(2).
Our Comments
In our view, in the particular situation, technically, the Corporation could not make the subsection 184(3) election. Furthermore, if SC were a "cooperative corporation", as defined in subsection 136(2), our view would be the same.
Furthermore, we do not intend to propose to the Department of Finance that the conditions for making an election by virtue of subsection 184(3) be changed, since there is a valid legislative alternative where a corporation cannot, for one reason or another, satisfy the conditions for validly making the election. In such a situation, a corporation may apply to the Minister pursuant to subsection 220(3.2) to revoke its election under subsection 83(2) in respect of the dividend it has paid.
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.