Principal Issues: 1) In a given fact situation, a corporation ("Xco") filed in 2001 an election under subsection 83(2) of the Act. The amount designated as a capital dividend exceeded the amount available to be paid as a capital dividend. No notice of assessment under Part III was ever issued in respect of Xco for the 2001 taxation year. Furthermore, no notification that no Part III tax is payable was ever issued in respect of Xco for such taxation year. 2) In another given fact situation, the Canada Revenue Agency ("CRA") never received an election made by a corporation ("Yco") under subsection 83(2) of the Act (the "1997 Election"). The 1997 Election was in respect of a dividend payable in XXXXXXXXXX 1997, but was dated XXXXXXXXXX 1998. No penalty for late filing was ever received in respect of the 1997 Election. At the time of the 1997 Election, an individual ("Y") was the only shareholder of Yco. Finally, the "normal reassessment period" in respect of the 1997 taxation year of Y and Yco would be expired. Furthermore, no waiver was filed within the normal reassessment period for Y or Yco in respect of their 1997 taxation year.
Position: 1) The CRA should first assess Part III tax in respect of the 2001 taxation year of Xco. If Xco elects under subsection 184(3) of the Act to avoid the Part III tax, the CRA would have to assess the shareholders of Xco in order to take into consideration the taxable dividend that would be deemed to be received by the shareholders under paragraph 184(3)(d) of the Act. Under subparagraph 184(4)(b)(ii) of the Act, such assessment of tax payable by the shareholders may be made notwithstanding subsection 152(4) to (5) of the Act. 2) The CRA should request, under subsection 83(3.1) of the Act, that an election referred to in subsection 83(3) be made by Yco in respect of the 1997 dividend. Yco could comply with this request within the ninety-day prescribed period and make a late filed election in 2005 in respect of the 1997 dividend. Yco would have to pay an estimate of the penalty in respect of such election, at the time the late-filed election is made. Under subsection 83(5) of the Act, the Minister would have to examine the late-filed election referred to in paragraph 83(3)(a), assess the penalty payable and send a notice of assessment to Yco in 2005. Under subsection 220(3.1) of the Act, the Minister may, depending on the circumstances, waive or cancel all or any portion of any penalty or interest otherwise payable by a taxpayer. If Yco does not comply with the CRA's request made under subsection 83(3.1) within the ninety-day prescribed period and considering the facts and circumstances surrounding the given situation, the application of subparagraph 152(4)(a)(i) should be considered with respect to Y and the dividend received by him from Yco in 1997.
Reasons: Wording of the Act.
May 2, 2005
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Montérégie-Rive-Sud Tax Services |
Income Tax Rulings Directorate |
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Tax client services |
S. Prud'Homme |
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3250 Lapinière Boulevard Brossard QC |
(613) 957-8975 |
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J4Z 3T8 |
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Attention: Ms. Chantal Trépanier |
2005-011997 |
Request for Opinion - Capital Dividend Election
This is in response to an email dated March 16, 2005 from Ms. Ginette Laroche. In that document, Ms. Laroche requested our opinion on two specific situations involving capital dividend elections.
We understand that Ms. Laroche's files have now been assigned to you. It is for this reason that this memo is addressed to you.
Unless otherwise stated, all statutory references herein are provisions of the Income Tax Act (the “Act”).
(1) First Particular Situation
You have presented us with the situation described below (the "First Particular Situation") as part of your request for an opinion.
(a) A particular corporation ("Xco") was a "private corporation" as defined in subsection 89(1). During 1999, Xco made an election to pay a capital dividend to its shareholders of approximately $XXXXXXXXXX pursuant to subsection 83(2). At the time of that election, Xco had established the amount of its "capital dividend account" ("CDA") at approximately $XXXXXXXXXX, consisting of approximately $XXXXXXXXXX that fell within paragraph (a) of the definition of CDA in subsection 89(1) and approximately $XXXXXXXXXX that fell within paragraph (b) of that definition.
(b) Upon review of Xco's 2001 "capital dividend" election, referred to below, it was determined that Xco's CDA never included an amount that fell within paragraph (b) of the definition of CDA in subsection 89(1). Indeed, the amount of approximately $XXXXXXXXXX received by Xco was a trust capital distribution.
(c) During 2001, Xco made an election to pay a capital dividend to its shareholders in a certain amount pursuant to subsection 83(2). The amount of that election exceeded the amount of Xco's CDA at that time by approximately $XXXXXXXXXX.
No Part III Notice of Assessment was issued for Xco's 2001 taxation year. We also understand that no notification that no Part III tax was payable was issued for Xco's 2001 taxation year.
(d) During 2002, Xco made an election to pay a capital dividend to its shareholders in a certain amount pursuant to subsection 83(2). We understand that the amount of that election did not exceed the amount of Xco's CDA at that time, even taking into account the fact that Xco's CDA never included an amount described in paragraph (b) of the definition of CDA set out in subsection 89(1).
(2) Our Comments on the First Particular Situation
Subsection 184(2) provides that a corporation that elects in accordance with subsection 83(2) in respect of the full amount of a dividend payable by it on shares of any class of its capital stock must pay, at the time of the election, the tax imposed by Part III. This tax must be paid on the amount by which a dividend paid by a corporation as a capital dividend exceeds the amount that may be so elected.
In addition, subsection 185(1) provides that the Minister shall, with all due dispatch, examine each election made by a corporation in accordance with subsection 83(2), 130.1(4) or 131(1), assess the tax, if any, payable under this Part in respect of the election and send a notice of assessment to the corporation.
In that regard, subsection 185(3) provides, inter alia, that subsection 152(4) applies to Part III, with such modifications as the circumstances require.
Based on the foregoing, we are of the view that in the First Particular Situation, the Canada Revenue Agency ("CRA") should assess tax under Part III for Xco's 2001 taxation year and send a notice of assessment in respect thereof.
Under subsection 184(3), a corporation that would otherwise be liable for Part III tax may elect, within the prescribed time and in the prescribed manner, to treat the "excessive capital dividend" as a separate taxable dividend and thus avoid Part III tax. Note that the election under subsection 184(3) is valid only if the conditions set out in subsection 184(4) are satisfied.
Where subsection 184(3) applies, the portion of the total dividend that is the amount of the CDA at the time of the capital dividend election pursuant to subsection 83(2) is deemed, for the purposes of that election and for all other purposes under the Act, to be the total amount of a separate dividend that became payable at the particular time (paragraph 184(3)(a)). In addition, the "excessive capital dividend" is generally deemed to be a separate taxable dividend that became payable at the particular time (paragraph 184(3)(c)). Finally, each person who held issued shares of the class of shares of the capital stock of the particular corporation on which the aggregate amount of the dividend was paid is deemed not to have received any part of the dividend and to have received the appropriate portion of the capital dividend and the taxable dividend determined pursuant to paragraphs 184(3)(a) and (c) (see paragraph 184(3)(d)).
Note that under subparagraph 184(4)(b)(ii), the Minister may, notwithstanding subsections 152(4) to (5), make appropriate assessments of tax, interest and penalties payable by each shareholder for any taxation year to take the corporation’s election pursuant to subsection 184(3) into account.
In light of the above, to the extent that Xco makes a subsection 184(3) election in respect of the 2001 dividend, the CRA would then have to make the appropriate assessments of the Xco shareholders who received that 2001 dividend to take into account the deemed taxable dividend received by such shareholders pursuant to paragraph 184(3)(d).
In closing on this point, it should be noted that the CDA account is not technically subject to a limitation period. The review of Xco's subsection 83(2) capital dividend election made in 2002, and any similar election made thereafter, should take into account the fact that Xco's CDA never included an amount that fell within paragraph (b) of the definition of CDA in subsection 89(1).
3) Second Particular Situation
You have also presented us with the following situation (the "Second Particular Situation") as part of your request for an opinion.
(a) A particular corporation ("Yco") was a "private corporation" as defined in subsection 89(1). During 2002, Yco made an election to pay a capital dividend to its shareholders of a certain amount pursuant to subsection 83(2). Calculations to support the amount of CDA available in 2002 would reflect a capital dividend payment of approximately $XXXXXXX made in 1997.
(b) We understand that, to your knowledge, the CRA never received the capital dividend election purportedly made by Yco in 1997 (the "1997 Election"). The CRA asked Yco's representative to produce a copy of the 1997 Election. The 1997 Election covered a dividend payable by Yco on XXXXXXXXXX 1997 but was dated XXXXXXXXXX 1998. We also understand that no late election penalty was paid by Yco in connection with the 1997 Election.
(c) At the time of the 1997 capital dividend, all of the issued and outstanding shares of the capital stock of Yco were held by an individual ("Y").
(d) The "normal reassessment period", as defined in subsection 152(3.1), for the 1997 taxation year of Y and Yco has expired. Furthermore, no waiver of the normal reassessment period has been filed by Y or Yco in respect of their 1997 taxation year.
(e) We understand that, as of the date hereof, Yco has not filed a late capital dividend election under subsection 83(3), accompanied by the payment of the estimated penalty amount in respect of that election calculated under subsection 83(4). We also understand that Yco has not made an application to the Minister pursuant to subsection 220(3.2) in respect of the 1997 Election.
(4) Our Comments on the Second Particular Situation
We are of the view that the CRA should, by written request served personally or by registered mail, request that a subsection 83(3) election be made by Yco in respect of the 1997 dividend under subsection 83(3.1).
Yco could comply with the CRA's request within 90 days of being served, and thus file a subsection 83(3) late capital dividend election in 2005. At the time this late election is made, Yco would technically have to pay an estimated penalty amount under subsection 83(4) in order for the election to be valid.
Subsection 83(5) provides that, in these circumstances, the Minister would review Yco's paragraph 83(3)(a) election, calculate the amount of penalty payable and issue a notice of assessment to the corporation in 2005.
Furthermore, we wish to remind you that under subsection 220(3.1), the Minister may waive or cancel all or part of any penalty or interest otherwise payable by a taxpayer under the Act to the extent that a request for such a waiver or cancellation is made by the taxpayer and accepted by the Minister based on criteria established when considering such requests.
To the extent that Yco does not respond to the CRA's request under subsection 83(3.1) within 90 days of being served with that request, and having regard to the facts and circumstances of the Second Particular Situation, we recommend that you consider applying subparagraph 152(4)(a)(i) in respect of Y for the purpose of assessing or reassessing any tax, interest or penalties payable by Y under Part I after the expiration of Y's normal reassessment period for 1997, in respect of the dividend paid by Yco and received by Y in 1997. This dividend would be a taxable dividend because the 1997 Election was not valid and Yco had refused the CRA's request under subsection 83(3.1). In these circumstances, no penalty calculated under subsection 83(4) or 220(3.5) would be payable by Yco.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Should you require further information on this subject, please do not hesitate to contact us.
Stéphane Prud'Homme, Notary, M. Fisc.
For the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch