Principal Issues: Where a corporation makes a late filed election pursuant to subsection 83(3) with respect to a dividend payable and paid at a particular time, whether the dividend will be added to the capital dividend account of the corporate shareholder at the time the dividend was paid.
Position: Yes.
Reasons: Subsection 83(3) deems the election to have been made at the time the dividend has become payable or on the first day on which any part of the dividend was paid, whichever is the earlier. Therefore, the conditions of subsection 83(2) would be met and the dividend received would not be included in computing the income of the corporate shareholder pursuant to subsection 83(2). In our view, the addition to the capital dividend account of the corporate shareholder for such a dividend would be done at the time of the receipt of the dividend.
XXXXXXXXXX 2017-071831 Sylvie Labarre, CPA, CA August 30 2017
Dear Madam,
Subject: Late-filed capital dividend election
This is in reply to your email of August 14, 2017 in which you requested our view on the date of inclusion of a capital dividend in a shareholder's capital dividend account where the election to pay a capital dividend is filed late by a corporation.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Hypothetical Situation
1. The capital dividend account of Corporation A Inc. ("Corporation A") was $40,000.
2. On January 1, Corporation A paid a capital dividend of $40,000 to its sole shareholder, Corporation B Inc. ("Corporation B").
3. The amount of $40,000 was paid by bank transfer on January 1 and the directors of Corporation A adopted a resolution dated January 1 to that effect.
4. Corporation A, however, failed to file Form T2054 Election for a Capital Dividend Under Subsection 83(2) (the "T2054").
5. On January 2, Corporation B paid a capital dividend of $40,000 to its sole shareholder, Mr. B.
6. The amount of $40,000 was paid by bank transfer on January 2 and the directors of Corporation A adopted a resolution dated January 2 to that effect.
7. Corporation B, however, failed to file Form T2054.
8. On September 1, Corporation A filed Form T2054 and made a late election in accordance with the terms of subsection 83(3) including, inter alia, the payment of the penalty.
9. On September 1, Corporation B filed Form T2054 and made a late election in accordance with the terms of subsection 83(3) including, inter alia, the payment of the penalty.
Question
Could Corporation B include in its capital dividend account, on January 2, the $40,000 dividend it received out of Company A's capital dividend account?
Our Comments
This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings and Technical Interpretations.
As noted by you, the "capital dividend account" as defined in subsection 89(1) includes:
(b) all amounts each of which is an amount in respect of a dividend received by the corporation on a share of the capital stock of another corporation in the period, which amount was, by virtue of subsection 83(2), not included in computing the income of the corporation,
Subsection 83(2) provides where at any particular time after 1971 a dividend becomes payable by a private corporation to shareholders of any class of shares of its capital stock and the corporation so elects in respect of the full amount of the dividend, in prescribed manner and prescribed form and at or before the particular time or the first day on which any part of the dividend was paid, no part of the dividend shall be included in computing the income of any shareholder of the corporation.
You also referred to subsection 83(3), which states:
Where at any particular time after 1974 a dividend has become payable by a corporation to shareholders of any class of shares of its capital stock, and subsection 83(1) or (2) would have applied to the dividend except that the election referred to therein was not made on or before the day on or before which the election was required by that subsection to be made, the election shall be deemed to have been made at the particular time or on the first day on which any part of the dividend was paid, whichever is the earlier, if
(a) the election is made in prescribed manner and prescribed form;
(b) an estimate of the penalty in respect of that election is paid by the corporation when that election is made; and
(c) the directors or other person or persons legally entitled to administer the affairs of the corporation have, before the time the election is made, authorized the election to be made.
[Your emphasis]
If the conditions for the application of subsection 83(3) were satisfied, the shareholder would thereby receive a dividend that would not be required to be included in computing the shareholder’s income under subsection 83(2) since the payer of the dividend would be deemed to have made its election at the earlier of the particular time or the first day on which any part of the dividend was paid. In our view, the shareholder could add the dividend received to the shareholder’s capital dividend account at the time of receipt of the dividend.
In the hypothetical situation that you submitted, Corporation A filed Form T2054 and made a late election in accordance with the terms of subsection 83(3), including, inter alia, the payment of the penalty. The election would be deemed to have been made on January 1.
Starting January 1, Corporation B could add the $40,000 dividend amount to its capital dividend account.
On September 1, Corporation B filed Form T2054 and made a late election in accordance with the terms of subsection 83(3), including, inter alia, the payment of the penalty. Mr. B thereby received on January 2 a capital dividend that would not be required to be included in computing his income.
We hope that our comments are of assistance.
Urszula Chalupa, LL.B, M. Fisc.
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch