The questioner, after noting that the payment of capital dividends only to taxable shareholders of a private company and not to its- tax-exempt shareholders, can also be avoided by redemption transactions targeted to the taxable shareholders, then asked whether:
it is indeed possible to pay a non-taxable dividend out of the CDA to Series 1 shareholders of the same class of shares while Series 2 shareholders of the same class of shares will receive a taxable ("eligible" or "other than eligible") dividend?
CRA responded:
Under subsection 248(6), where a corporation issues shares of a class of its capital stock in one or more series, each series is to be treated as a class of shares for the purposes of the Income Tax Act.
Thus, to the extent that the applicable corporate law allows the corporation to pay a separate dividend on a series of shares of a given class of its capital stock … the election provided for in subsection 83(2) could be made with respect to the dividend that became payable on that series.
Furthermore … if it were the case that certain reorganizations or conversions of shares carried out through a transaction, or as part of a series of transactions, one of the main purposes of which is to enable shareholders to receive capital dividends, then the application of subsection 83(2.1) should be considered.