Principal Issues: Whether in the fact situation described in the question, the CRA’s position in document 9429465 would apply.
Position: In these circumstances, it can be argued that the value of the RTDOH is reflected in the value of the shares and therefore that it does contribute to the gain on the shares.
Reasons: See below.
FEDERAL TAX ROUNDTABLE, OCTOBER 7, 2022
APFF CONFERENCE 2022
15. Application of section 55(2) I.T.A.
A corporation, with a December 31 year-end, sells all of its assets on November 30 and realizes a capital gain resulting in refundable dividend tax on hand ("RDTOH").
According to Technical Interpretation 9429465 (footnote 1), the CRA's position would be to consider the refund of RDTOH in the computation of safe income only at the time the credit is received or when it is applied against the payment of the refundable portion for the year.
Thus, if the corporation pays a dividend on December 1, its RDTOH will only be considered in the safe income calculation on December 31. This will result in a partial capital gain, as the portion of safe income related to the dividend refund ("DR") is missing. However, the corporation is simply distributing its cash after the sale of assets.
Questions to the CRA
(a) Will the DR be considered safe income as of December 1st?
(b) If CRA considers it not to be included in safe income on December 1st, is it lost or will it be added to a future safe income calculation?
CRA Response
We understand from the situation presented that there is a sale of all the assets of a corporation followed by a dividend payment of an amount representing the net value of that corporation.
In the context of a situation as described in the question and to the extent that it is reasonable to consider that the DR contributes to the hypothetical capital gain in respect of the shares on which the dividend was received (assuming a disposition at FMV of the shares immediately prior to the dividend), the CRA would be willing to take the position that the DR receivable is to be considered in computing income earned or realized as of December 1.
Consequently, in such a situation, the taxes payable and not refundable in respect of the income arising from the sale of the assets will have to be subtracted from the safe income calculated for the period, as it is reasonable to assume that they do not contribute to the capital gain that would be realized on a share of the capital stock of the corporation.
Marc Séguin
October 7, 2022
2022-094224
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Canada Revenue Agency, Technical Interpretation 9429465, February 3, 1995.