G. Thornley (613) 957-2130
February 28, 1986
Dear XXXX
Re: Capital Dividend Account
This is in reply to your letter of December 11, 1985 concerning whether or not a capital gain reserve that is to be brought into income at the end of the taxation year should be taken into consideration in the calculation of the Capital Dividend account that may be calculated at any particular time in the year.
Our comments
As you point out, paragraph 11 of Interpretation Bulletin IT-66R5 covers only the converse situation to that outlined above. It should be noted, however, that the particular example used in paragraph 11 of IT-66R5 is intended as a cautionary note against an excessive election as described in paragraphs 18 to 21 inclusive. The paragraph in question is not intended to be restrictive and therefore the principle expressed therein is applicable to your situation as well.
To sum up, it is our view that in calculating the capital dividend account at any particular time in the year, recognition may be given to a reserve calculated under subparagraph 40(1)(a)(iii) of the Act in the previous year that will be brought into income in the current year under paragraph 40(1)(a)(ii) of the Act, provided no portion thereof is claimed as a reserve at the end of that year.
We trust that our explanation will satisfactorily answer your inquiry.
Yours truly,
ORIGINAL SIGNED BY Wm. R. McColm
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch