Principal Issues: In the context of a sale of shares, the sellers may agree in advance that elections under subsections 185.1(3) and 184(3) shall be made in the event of, respectively, an excessive eligible dividend designation or an excessive capital dividend election. a) Whether the CRA accepts this consent in advance with respect to the elections under subsections 185.1(3) and 184(3) without the shareholders’ involvement at the time the election is made. b) Whether the CRA requires the issuance of T5 slips where an election under subsection 184(3) is made? Whether the CRA requires the issuance of amended T5 slips where an election under subsection 185.1(2) is made?
Position: a) Yes, b) Generally no, but see response below for information requirements.
Reasons: Wording of the Act.
FEDERAL TAX ROUNDTABLE, OCTOBER 7, 2021
APFF CONFERENCE 2021
Question 10
Concurrence in the context of an excessive eligible dividend or excess capital dividend designation
In transactional contexts, different parties may make commitments to an excessive eligible dividend designation or excessive capital dividend. This is often the case where, as part of the transactions, the vendor undertakes a pre-sale reorganization of the shares of a corporate group. As part of their undertakings under the various sale agreements, vendors agree in advance that the various elections will be made in the case of an excessive eligible dividend designation or capital dividend excess.
T5 slips must also be produced in the context of such elections.
Questions to the CRA
a) Would the CRA accept an advance concurrence to an election under subsection 185.1(3) in the context of an excessive eligible dividend designation, or to an election under subsection 184(3) in the context of an excessive capital dividend, without the shareholder's involvement at the time of the election?
a) Does the CRA require the filing of T5 slips where an excessive capital dividend is designated and the election is made? Does the CRA require the filing of amended T5 slips where an excessive eligible dividend designation is made and the election is made?
CRA Response to question 10(a)
Subsection 185.1(2) allows a corporation to make an election to treat all or part of the amount of the excessive eligible dividend designation as a separate ordinary dividend to eliminate or reduce the Part III.1 tax otherwise payable. The corporation must file that election on or before the 90th day after the date of mailing of the notice of assessment of Part III.1 tax. For that election to be valid, subsection 185.1(3) requires, inter alia, that it be made with the concurrence of the corporation and certain of its shareholders. If the election is made within 30 months of the dividend payment, the consent of all shareholders who received, or were entitled to receive, the original dividend and whose addresses were known to the corporation must be obtained. If the election is made after the expiry of the 30 months, the consent of all the shareholders who received or were entitled to receive the original dividend must be obtained, regardless of whether the corporation knew their addresses.
Subsection 184(3) allows a corporation to make an election, in prescribed manner, on or before the day that is 90 days after the day of sending of the notice of assessment in respect of the tax payable by virtue of subsection 184(2), to deem the excess portion of a capital dividend or a capital gains dividend to be a separate taxable dividend. For that election to be valid, subsection 184(4) requires, inter alia, that it be made with the concurrence of the corporation and certain of its shareholders. If the election is made within 30 months after the day the original dividend became payable, the consent of all shareholders who received or were entitled to receive all or part of the original dividend and whose addresses were known to the corporation must be obtained. If the election is made after the expiry of the 30 months, the consent of all shareholders who received or were entitled to receive all or part of the original dividend must be obtained, irrespective of whether the company knew their address.
In a context similar to that described in the statement of this question, the CRA generally accepts that shareholders may give their consent in advance, through undertakings under the various sale agreements, to the making of elections under subsections 184(3) and 185.1(3).
CRA response to question 10(b)
When a subsection 184(3) election is filed, additional T5 slips must usually be filed. However, since in such circumstances the number of shareholders is generally small and their respective returns have generally been assessed at the time the 184(3) election is filed, the CRA will not request the preparation of T5 slips in respect of that election unless the circumstances make that procedure practical.
However, if an excess capital dividend is determined in the year it is paid or payable, the corporation will have to file additional T5 slips by the last day of February of the following year, as the shareholder will not have to file his or her tax return until the following year.
Where a corporation files an election under subsection 185.1(2), the CRA requires the corporation to provide, inter alia, at the time of the election, either the revised amounts of eligible dividends and separate ordinary taxable dividends for each shareholder, or copies of T5 slips.
Response prepared by:
Sidi Ouattara
(438) 340 0237
October 7, 2021
2021-090100
Response approved by:
Thompson Ross
Processing and Contribution Programs Section
Processing and Assessment Section
Specialized and Corporate Returns Division
Business Returns Directorate
Assessment, Benefits and Services Branch