Principal Issues: Whether a capital dividend election under subsection 83(2) can be made in respect of a dividend paid on a series of shares.
Position: Yes provided it is permitted under corporate law.
Reasons: Wording of the Act.
FEDERAL TAX ROUNDTABLE OCTOBER 7, 2020
APFF CONFERENCE 2020
7. Capital Dividend Account ("CDA") and payment of a dividend on a separate series of shares of the same class
Certain shareholders of a Canadian-controlled private corporation ("CCPC") may be non-taxable entities (such as government entities or certain venture capital corporations) or nonresidents of Canada. For those shareholders, a dividend from the CDA of the corporation in which they are shareholders has no particular significance. There are a few ways to avoid paying CDA dividends to such shareholders. These include separate classes of shares, or paying a high-low preferred share dividend followed by separate redemptions of the preferred shares so that the deemed dividend comes from the CDA for those shareholders for whom it is relevant.
There are also classes of shares for which it is possible to provide for the creation of series within the same class of shares, so that shareholders could hold shares of the same class but of a separate series. This would allow for the payment of a dividend from the CDA only on one series of a class (e.g. Series 1, but not Series 2).
However, subsection 248(6) provides that:
“In its application in relation to a corporation that has issued shares of a class of its capital stock in one or more series, a reference in this Act to the “class” shall be read, with such modifications as the circumstances require, as a reference to a “series of the class.””
Question to the CRA
Can the CRA confirm that 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 Response
Subsection 83(2) applies, inter alia, 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. 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, we are of the view that the election provided for in subsection 83(2) could be made with respect to the dividend that became payable on that series.
Furthermore, we are of the view that 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.
Nancy Charlebois
(514) 496-8591
October 7, 2020
2020-085219
UNCLASSIFIED