Principal Issues: (1) Since the prescribed manners applicable in order to file the election appear not to have been published, is it possible to know how a corporation should proceed to make an election under subsection 185.1 (2) ITA in order not to be subject to Part III.1 tax? (2) Can the corporation follow the prescribed manners applicable to a subsection 184(3) election?
Position: (1) CRA Website (2) No
Reasons: See answer
9 OCTOBER 2015 FEDERAL TAX ROUNDTABLE
2015 APFF CONFERENCE
Question 23 Election to treat excessive capital dividend designation as ordinary dividend
Subsection 185.1(2) provides that a corporation that would be liable to pay tax on excessive eligible dividend designations (as provided in subsection 185.1(1)) may elect in prescribed manner on or before the day that is 90 days after the day of sending the notice of assessment in respect of that tax.
When this election is made, a portion of the excessive dividend designation may thus be considered to be an ordinary dividend for shareholders and not an eligible dividend. This allows the company to avoid paying the tax on the excessive designation of eligible dividends, also known as Part III.1 tax.
As the wording of this statutory provision was amended in 2010 to replace "on the prescribed form" with "in the prescribed manner”, we understand that no prescribed form exists to make such an election.
Furthermore, there does not seem to be any Regulations respecting the elecction, as is the case, for example, in section 2106 ITR in respect of a similar election for excess capital dividend designations (subsection 184(3)).
Question to CRA
As the regulatory terms and conditions do not appear to have been published to date, how might a corporation proceed to make an election under subsection 185.1(2) so as to avoid Part III.1 tax? Can it follow the applicable regulatory requirements applicable to an election made under subsection 184(3)?
CRA Response
The procedure for making an election in order for an excessive dividend designation to be treated as an ordinary dividend, as authorized by the Minister of National Revenue, is described on the CRA website at the following address:
www.cra-arc.gc.ca/tx/bsnss/tpcs/crprtns/dvdnds/lctn-fra.html.
Speaking generally, the corporation must provide a signed letter, to the Taxation Centre where the corporation files its income tax return, indicating that, for the particular dividend, the corporation has made the election under subsection 185.1(2). The corporation must also attach the documents specified on the CRA website. This election must be made, at the latest, 90 days after the date of the sending of the notice of assessment respecting Part III.1 tax.
Stéphane Charette
(613) 670-9012
October 9, 2015
2015-059831