Principal Issues: Whether the CRA would accept that a private corporation be allowed to make a 83(2) election with respect to the amount of a 84.1 deemed dividend paid to a person that is not a shareholder of the particular private corporation.
Position: No.
Reasons: Previous positions.
XXXXXXXXXX . Jelena Pajkovic (613) 941-0782 2011-041473 January 4, 2012
Subject: Interaction Between Section 84.1 and Subsection 83(2) of the Income Tax Act (the "Act")
Dear Madam,
This is in response to your July 11, 2011 email regarding whether the Canada Revenue Agency (the "CRA") intends to adopt a permissive position regarding the eligibility of a deemed dividend arising under section 84.1 for the election under subsection 83(2).
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
In your email, you formulated your request as follows:
1. The payment of a capital dividend by a private corporation to its shareholders is made by virtue of an election under subsection 83(2). Subsection 83(2) provides that:
“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 if that day is earlier than the particular time, the following rules apply:
(a) the dividend shall be deemed to be a capital dividend to the extent of the corporation’s capital dividend account immediately before the particular time; and
(b) no part of the dividend shall be included in computing the income of any shareholder of the corporation”. [Our emphasis]
2. The current wording of paragraph 84.1(1)(b) does not state that the deemed dividend paid by the corporation is deemed to have been paid on a class of shares of its capital stock. In addition, section 84.1 does not include any presumption that the recipient of the deemed dividend is deemed to be a shareholder holding shares in the paying corporation as required by the wording of subsection 83(2), thereby rendering the election under that paragraph not possible with respect to that deemed dividend.
3. In Technical Interpretation 2006-0183851E5 dated May 30, 2007, the CRA was of the view that the election of subsection 83(2) could be made if the dividend deemed to be paid by virtue of subsection 84.1 became payable by a private corporation to a shareholder already holding shares of any class of the capital stock of the corporation that was deemed to have paid the dividend. All deemed dividends paid by virtue of section 84.1 were not included because it will first be necessary to ensure that the shareholder who disposed of the shares previously held shares in the acquiring corporation even if the shares were not otherwise participating.
4. In September 2002, in Technical Interpretation 2002-0128955, the CRA stated that it would make sense, as a matter of tax policy, to permit a deemed dividend under subsection 84.1 be eligible for an election under subsection 83(2) and that the Department of Finance would be informed of this problem in the drafting of the Act.
Question
5. Nearly 10 years later, with the Department of Finance having not yet taken corrective action in this regard, you wish to know if the CRA now intends to adopt a permissive administrative position in this situation.
Our Comments
Contrary to what you have stated, in Technical Interpretation 2002-0128955 we did not state that it would make sense under tax policy to allow a deemed dividend under subsection 84.1 to be eligible for an election by virtue of the Act. In that technical interpretation we simply stated that the Department of Finance was informed that the wording of subsection 84(7) could be interpreted as contradicting our position that an election under subsection 83(2) could not be made in respect of a deemed dividend paid under paragraph 84.1(1)(b) to a person who was not a shareholder of the corporation.
The CRA does not intend to adopt a permissive administrative position in a situation such as that described in Technical Interpretation 2002-0128955 (i.e., where the dividend is payable by a private corporation to a person other than a shareholder of the corporation).
We hope that our comments will be of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Reorganizations Section IV
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch