FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011
Principal Issues: In two fact situations, where (1) In a resolution dated October 31, 2011, the directors of a corporation validly declare a capital dividend to its three shareholders (Mrs. A and B and Mr. C) which becomes payable November 30, 2011 (2) the corporation realizes a capital loss which causes the capital dividend to be greater than its CDA before the dividend becomes payable and (3) in a new resolution, the directors of the corporation split the dividend in two: (i) if the T2054 is filed after the dividend is split and before it becomes payable, whether the CRA would accept the resolution splitting the dividend for the purpose of the T2054? and (ii) if the T2054 is filed before the directors split the dividend and the dividend becomes payable, whether the CRA would accept an amended T2054 based on the new resolution?
Position: In both situations, the T2054 must be prepared on the basis of the October 31, 2011 directors' resolution whether it's filed before or after the directors pass a resolution to split the dividend in two. In our opinion, after validly declaring a dividend the directors of the corporation cannot modify the dividend. Hence, technically, subsection 184(2) would be applicable when the dividend becomes payable or when the T2054 must be filed (November 30, 2011). In both cases, the corporation should inform its Tax Services Office that its total capital dividend payable is in excess of its CDA, that the excess is caught by subsection 184(2) and that it wishes that the effect of making the election under subsection 184(3) apply to it. In doing so, the corporation could avoid a part III assessment otherwise applicable and meet its objective of paying to its shareholders a capital dividend of the amount of its CDA and a taxable dividend in the amount of the excess. In such circumstances, CRA could apply its administrative practice (designated "Short Cut Method") under which no part III assessment is issued to the corporation and reassessments are only issued to the shareholders to include in their income their respective part of the taxable dividend.
Reasons: The law and CRA`s administrative practice (Short Cut Method)
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011
Question 4
Subsequent splitting of a capital dividend election
The board of directors of a corporation declared a dividend (the "Initial Capital Dividend") to be paid out of the capital dividend account (the "CDA") to its three shareholders, Mrs. A and B, as well as Mr. C. The resolution, prepared in good and proper form, was dated October 31, 2011 and indicated that the Initial Capital Dividend would be paid on the following November 30 and that no portion of such dividend would be payable before that date.
Between October 31, 2011 and November 30, 2011, the corporation realized a significant capital loss that reduced the CDA's balance. Thus, the amount of the Initial Capital Dividend now exceeded the CDA amount as adjusted for the capital loss sustained.
Consequently, and in accordance with corporate law, before the end of November 2011, the board of directors amended the amount of the Initial Capital Dividend (the "Amended Capital Dividend") to correspond to the balance of the CDA immediately before it becomes payable. The amount of the Initial Capital Dividend was therefore divided into two dividends, one in the amount of the Amended Capital Dividend and one in an amount equal to the excess of the Initial Capital Dividend over the amount of the Amended Capital Dividend. The payment was made to shareholders on November 30, 2011.
Questions to the CRA
In the situation described above,
a) Assuming that the election form T2054 - Election for a Capital Dividend Under Subsection 83(2) ("Form T2054") is filed by the corporation after the amendment of the Initial Capital Dividend and before November 30, 2011, would the CRA agree to have the Initial Capital Dividend split into two dividends as a result of the amendment resolution by the board of directors?
b) Assuming that Form T2054 is filed by the corporation before the amendment of the Initial Capital Dividend and the CRA is notified of the change before November 30, 2011, would the CRA accept an amended election?
CRA Response
In both situations with respect to this issue, we are of the view that Form T2054 should be prepared on the basis of the board resolution adopted on October 31, 2011, regardless of whether Form T2054 is filed before or after the adoption by the board of directors of a second resolution to split the dividend into two dividends. Indeed, we are of the view that after having validly declared a dividend, the board of directors cannot modify it.
Consequently, in both situations, technically, subsection 184(2) would be applicable at the time the dividend becomes payable and the Form T2054 must be filed, i.e. on November 30, 2011.
However, in both situations, the corporation should inform the CRA Tax Services Office as soon as possible that the total amount of capital dividend payable by it exceeds the amount of its CDA, there is an excess (the "Excess Dividend") as referred to in subsection 184(2), and that it wishes that the effect of making the election under subsection 184(3) be applicable to it.
Indeed, in the situations described in the question, the CRA could apply the administrative practice (the "Short Cut Method") under which no Part III assessment is issued to the corporation by the CRA and reassessments are only issued to the shareholders to include, in computing the income of each of them, their portion of the Excess Dividend.
In order to avail itself of the Short Cut Method, the corporation must send, to the Tax Services Office serving it, a letter containing inter alia the following information:
- A statement from the corporation that it is asking the CRA to apply the Short Cut Method for the purpose of resolving the excess, referred to in subsection 184(2), in respect of the election it made by virtue of subsection 83(2);
- The date of payment of the dividend;
- The identity of each shareholder having received or expected to receive a portion of the dividend;
- Each shareholder's respective share of the taxable Excess Dividend that is a separate taxable dividend determined in accordance with the calculation provided in paragraph 184(3)(c); and
- A confirmation to the effect that each shareholder agrees that the shareholder’s share of the taxable Excess Dividend, that is, the shareholder’s share of the separate taxable dividend, determined in accordance with the calculation provided in paragraph 184(3)(c), be included in computing the shareholder’s income.
Response prepared by: Marc LeBlond
(613) 957-2108
2011-041207
Response approved by: Doug Schober,
Program Officer
Special Statements and Elections
T2 Treatment and Assessment Section
Business Registration and Corporation Programs Division
Business Returns Branch
Assessment and Benefit Services Branch
(604) 951-7161