Principal Issues: Subsection 88(2) applies in the course of a winding-up of a Canadian corporation (to which subsection 88(1) does not apply) when, at a particular time in the course of the winding-up, all or substantially all of the property of the corporation is distributed to its shareholders. Where the corporation is, by virtue of subsection 84(2), deemed to have paid at the particular time the winding-up dividend, paragraph 88(2)(b) provides, inter alia, that for the purposes of an election pursuant to subsection 83(2), the portion of the winding-up dividend that does not exceed the corporation’s CDA balance immediately before the particular time is deemed to be a separate dividend. An election under subsection 83(2) must be filed in prescribed form by the earlier of the day on which the dividend becomes payable and the first day on which any part of the dividend is paid. In a particular situation, all the assets of the corporation ("Holdco") being wound-up would consist of portfolio investments (or any other asset the fair market value of which fluctuates over time). As such, it would be impossible to file form T2054 on time as the fair market value of Holdco's property distributed to its shareholders as well as Holdco's CDC balance, could not be established before the time limit referred to in subsection 83(2). Whether there would be any relief in this situation. If not, is there any administrative procedure available?
Position: Where, in a context similar to the above and the winding-up dividend is in excess of the CDA, the balance of the CDA as assessed by the CRA differs from the amount computed by the corporation at the time of the election under subsection 83(2) in respect of the separate dividend, the CRA will adjust the amount of the separate dividend and Form T2054 to reflect the balance assessed. To facilitate the CRA’s processing under these circumstances, the directors of the corporation should draft their resolutions with such wording as to clearly indicate that the deemed separate capital dividend for which Form T2054 is filed corresponds to a portion of the winding-up dividend to which subsection 88(2) applies.
Reasons: The Law and CRA’s administrative practice.
APFF FEDERAL TAX ROUNDTABLE 6 OCTOBER 2017
APFF CONFERENCE 2017
Question 4
CDA form on a winding-up
For the purpose of calculating the capital dividend account ("CDA"), in connection with the winding-up of a corporation other than a subsidiary, paragraph 88(2)(a) provides, inter alia, that where all or substantially all of the property owned by the corporation immediately before that time was distributed to the shareholders of the corporation, the year-end of the corporation is deemed to have ended immediately before such distribution and the corporation is deemed to have disposed of its property at its fair market value ("FMV") immediately before the deemed year-end. Under subsection 84(2), this distribution of property is deemed to be a winding-up dividend of the corporation to its shareholders.
Paragraph 88(2)(b) provides that the portion of the winding-up dividend that the corporation is deemed to pay under subsection 84(2), which does not exceed the balance of the CDA, is deemed to be a separate dividend for the purposes of the election under paragraph 83(2). In order for this portion of the winding-up dividend to be a capital dividend, an election under subsection 83(2) must be filed on the earlier of the day on which any part of the dividend is paid and the time the dividend becomes payable. A delay in the filing of this election results in a late filing penalty.
In the case, for example, of the winding-up of a corporation holding only investments (or any other asset whose FMV cannot be determined before the time of transfer because of its continual fluctuation), it is not possible to determine, in advance, the capital gain resulting from the deemed disposition of such an asset on its distribution in the course of the winding-up. Consequently, it is impossible to make an election pursuant to subsection 83(2) within the time required as the FMV of that asset and the gain realized on its disposition can be determined only after the winding-up and, therefore, after the payment of the winding-up dividend for which the election under subsection 83(2) must be made. In this situation, the form will have to be filed late and penalties for late filing will have to be paid.
Question to the CRA
Is there any relief for such a situation? If not, is any particular procedure planned or envisaged?
CRA response
In a context similar to that described in this question and where the winding-up dividend exceeds the corporation's CDA balance, the portion of the winding-up dividend, deemed to be the total amount of a separate dividend (the "Separate Dividend") for an election under subsection 83(2) (the “Election"), will always be equal to the CDA balance at the time of computation. Accordingly, the accuracy of the amount of the Separate Dividend depends on the final CDA balance, as determined by the CRA.
While a corporation remains responsible for computing its CDA balance as accurately as possible in light of all known facts at the time the Election is to be made, the CRA recognizes that special circumstances may render its caculation extremely difficult.
Consequently, when the balance of the CDA, as determined by the CRA, differs from the balance calculated by the corporation at the time an election is to be made, the CRA will adjust the amount of the Separate Dividend as well as the Form T2054 - Election for a Capital Dividend Under Subsection 83(2) to reflect the CDA balance as determined. This follows from our understanding that the purpose of the Income Tax Act is to allow a corporation to inter alia distribute its CDA on a winding-up governed by subsection 88(2).
In order to facilitate the CRA's processing of an election in such circumstances, a resolution from the corporation’s directors should be drafted so as to clearly indicate that the Separate Dividend, in respect of which the Form T2054 is filed, constitutes a portion of a winding-up dividend to which subsection 88(2) applies.
While under normal circumstance the CRA expects a resolution to refer to the total amount of a dividend subject to an election, which should be the same as that on the Form T2054, the CRA can accept, under these particular circumstances, such an amount not being specifically stated in that resolution.
In general, the CRA considers an Election as invalid when it is not made in respect of the total amount of a declared dividend. However, the CRA will agree to make an exception to this requirement where the winding-up dividend exceeds the corporation's CDA.
Response prepared by:
Jean Lafrenière
(613) 670-9013
October 6, 2017
2017-070902
Response approved by:
Justin Andeel
Treatment of T2 filing section
Specialized Returns Division
Business Returns Branch
Assessment, Benefit and Service Branch
(613) 952-9244