Principal Issues: Whether the CRA generally accepts the "Short Cut Method" as described in document 2011-0412071C6.
Position: The Short Cut Method is an administrative practice and is currently accepted by the CRA as an alternative to the legislatively sanctioned 184(3) election provided for in the Income Tax Act. However, the CRA determines whether the circumstances of a specific case warrants the usage of the Short Cut Method and it is up to the discretion of the officer processing the excessive election to decide if the Short Cut Method is appropriate in a situation.
Reasons: Method described in Complex SERS Manual of the T2 Processing and Assessing Programs Section, Business Returns Directorate, Assessment, Benefit and Service Branch. Method to the benefit of both the CRA and the taxpayer.
APFF FEDERAL TAX ROUNDTABLE 6 OCTOBER 2017
APFF CONFERENCE 2017
Question 5
Short cut method and separate dividend election under subsection 184(3)
Subsection 184(2) provides that a corporation is subject to a tax of 60% on the portion of the capital dividend paid in excess of its existing capital dividend account (“CDA”) balance at that time. Where this is the case, an election may be made under subsection 184(3) so that the "excess" dividend is deemed to be a separate taxable dividend.
Technical Interpretation 2011-0412071C6, dated October 7, 2011, indicates that the CRA could in some cases apply its administrative practice (the "Short Cut Method") under which no Part III assessment is issued to the corporation under 184(2) and reassessments are only issued to the shareholders of the corporation to include in their income their respective portions of the excess dividend.
Question to the CRA
Is the "short-cut method” generally permitted at all times by the CRA in the event of an error in the calculation of the CDA by the taxpayer resulting in an excess dividend, or is the "short-cut method” only permitted in certain exceptional circumstances?
CRA response
The short-cut method (or direct assessment method) is an administrative measure adopted by the CRA in order to allow direct contributions to the shareholders of a corporation that would have paid an excess amount resulting from an election under subsection 83(2). This administrative measure avoids, where applicable, the CRA, issuing to the corporation a notice of assessment for Part III tax and a subsequent notice of reassessment to reverse that Part III tax where the corporation and the shareholders of the corporation agree to be taxed on a taxable dividend equal to the amount of the excess. This is a method that benefits both the taxpayers concerned and the CRA as it reduces the time required to process an extra election and taxes the shareholders directly on the amount of the excess.
This administrative practice is still in effect and the CRA is generally prepared to apply it to a file, both at the taxpayer's request and during the audit of an election under subsection 83(2). The use of this methodology, however, remains at the discretion of the CRA to determine whether the circumstances of a file are appropriate for the application of this methodology. If the CRA determines that the short-cut method is not appropriate to a file, it will inform the taxpayer and the terms and conditions set out under subsections 184(2) and following must be followed.
Response prepared by:
Marc Séguin
(514) 620-8562
October 6, 2017
2017-070903
Response approved by:
Justin Andeel
Program Officer
Special filings and elections
T2 Treatment and Assessment Performance Section
Specialized Returns and Corporations Division
Business Returns Branch
Assessment, Benefit and Service Branch
(613) 952-9244