31 October 1989 Income Tax Severed Letter AC74413 - Capital Dividend Election

OCT 31 1989

J.M. Legault, Director               Specialty Rulings
Returns Processing Division            Directorate
Assessing and Enquiries Directorate  S. Leung
                                     957-2116

Attention: D.I. Wyse, Chief
           Trust and SER Assessing Section

                                               7-4413

Capital Dividend Election Subsection 83(2)

This memorandum is in response to yours dated October 6, 1989 with respect to the date on which a capital dividend election is made.

Pursuant to subsection 83(2) of the Income Tax Act (the "Act"), a corporation which elects under that subsection is required to make such election at or before "the particular time" or the first day on which any part of the dividend was paid if that day is earlier than the particular time. The "particular time" is the time a dividend becomes payable as indicated in the preamble of subsection 83(2) of the Act. For the sake of simplicity, in the following analysis let us assume that no dividend has been paid before the particular time so that the election is only required to be made by the corporation on or before the particular time.

Normally, the time that the election is made is the time that the prescribed form T2054 is filed with Revenue Canada, Taxation. Section 2101 of the Income Tax Regulations (the "ITR") supports this interpretation as the preamble of that subsection states that

         "Any election under subsection 83(2) of the Act...shall
         be made by filing with the Minister... (a) the form
         prescribed by the Minister...."

Consequently, form T2054 and its supplementary documentation must be filed before an election under subsection 83(2) of the Act is considered to be made. As the election must be made in prescribed manner and prescribed form at or before the "particular time" (i.e. the time the dividend becomes payable), the filing of the prescribed form must be made on or before the time the dividend becomes payable.

We would like to point out that the time that a resolution declaring the dividend is executed by the Board of Directors of the corporation is not "the particular time" unless the dividend becomes payable at the same time it is declared. Similarly, the time that a resolution authorizing the subsection 83(2) election as described in paragraph 2101(b) of the ITR is executed is not "the particular time". Consequently, a capital loss sustained by the corporation after the above mentioned resolutions but before the time the dividend becomes payable is required to be included in the computation of the capital dividend account of the corporation because the capital dividend account is required to be computed immediately before the particular time as described in paragraph (a) of subsection 83(2) of the Act.

Therefore, we do not agree with the representative of the corporation in the situation described in your memorandum that the election is made on the date of resolution. We agree with your interpretation that the election is made on the date the prescribed form T2054 is filed. However, we do not concur with your view that "the particular time" means the day on which the said form T2054 is filed. In summary, it is our view that the "particular time" is the time the dividend becomes payable and the date the election is made is the date of the filing of form T2054 which can be filed on or before the particular time.

Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch