Principal Issues: Would the CRA accept the filing of a resolution of the directors and Form T2054 where the amount of the CDA dividend would be expressed in the form of a mathematical formula?
Position: No. Reg. 2101 states that, among others, the prescribed form (T2054) and a certified copy of the resolution of the administrators authorizing the election shall be filed to the Minister. The CRA expects that such resolution will specify the amount of the dividend subject to the election under subsection 83(2) which should be the same as the one shown on Form T2054.
Reasons: According to the Law.
FEDERAL TAX ROUNDTABLE OCTOBER 7, 2020
APFF CONFERENCE 2020
9. CDA determined by mathematical formula
ABC Inc. is owned by a single shareholder. As part of a business transaction, the shareholder of ABC Inc. agreed to sell all of its shares to an unrelated third party. In the taxation year ending immediately prior to the sale transaction, ABC Inc. realized capital gains, half of which will be included in the CDA of ABC Inc.
The shareholder of ABC Inc. wishes to extract the balance of the CDA of ABC Inc. before the sale of its shares. However, the exact balance of the CDA will only be known once ABC Inc. has prepared its tax return for the year in question ending immediately before the sale, i.e. after the sale of the ABC Inc. shares to the unrelated party.
Where a capital dividend is paid, an election pursuant to subsection 83(2) must be filed at the earlier of the time the dividend becomes payable and the time any part of the dividend is paid. A delay in filing that election results in a late filing penalty. In this situation, ABC Inc. would be unable to file its T2054 form on time and would have to pay the late filing penalty since it would not be able to determine the precise amount of the capital dividend to be declared at the time it is declared and it would not be possible to wait for the confirmation of the balance of the CDA to declare this dividend since, at that time, the shareholder would no longer be a shareholder of ABC Inc.
Question to the CRA:
Would the CRA accept a resolution of the directors of ABC Inc. and a T2054 form where the amount of the capital dividend would be shown only by a mathematical formula, i.e., it would be, at the time of signing, a determinable, but not a determined, amount?
CRA Response
Subsection 83(2) allows a private corporation to make an election (the "Election") to deem a dividend to have been paid out of its CDA. Section 2101 of the Income Tax Regulations (footnote 1) requires the corporation to file with the Minister, inter alia, the prescribed form (footnote 2) and a certified copy of the resolution of the directors authorizing the election.
The CRA expects that such a resolution will refer to the amount of the dividend covered by the election, which should be the amount reported on Form T2054.
The CRA does not intend to adopt an administrative policy with respect to the situation described in the statement of this question.
In closing, it should be noted that the maximum amount of the penalty assessed under subsection 83(4) is $41.67 for each month or part of a month between the due date for filing the Election and the day the Election is filed.
Sidi Ouattara
(450) 926-7687
October 7, 2020
2020-085221
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 C.R.C., c. 945 (“ITR”).
2 CANADA REVENUE AGENCY, Form T2054 “Election for a Capital Dividend Under Subsection 83(2)”
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