Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Computation of a corporation's capital dividend account ("CDA") in two given fact situations ("Situation A" and "Situation B").
Position: Situation A: No amount would be included in the corporation's CDA under paragraph (c) or (c.1) of the definition of CDA in subsection 89(1) of the Act at the end of the Corporation's 2002 taxation year. However, an amount would be included in the corporation's CDA under paragraph (c.2) of the definition of CDA at the end of the corporation's 2002 taxation year.
Situation B: No amount would be included in the corporation's CDA under paragraph (c.1) of the definition of CDA in subsection 89(1) of the Act at the end of the Corporation's 2001 taxation year. However, amounts would be included in the corporation's CDA under paragraphs (c) and (c.2) of the definition of CDA at the end of the corporation's 2001 taxation year.
Reasons: Wording of the Act.
2002-017353
XXXXXXXXXX S. Prud'Homme
(613) 957-8975
January 21, 2003
Dear XXXXXXXXXX:
Re: Capital Dividend Account - Paragraphs (c) and (c.2) of the definition of "capital dividend account" in subsection 89(1) of the Income Tax Act
This is in reply to your letter dated November 12, 2002 in which you requested our views on the computation of a corporation's capital dividend account ("CDA") as that expression is defined in subsection 89(1) of the Income Tax Act (the "Act") in two situations described below.
The particular circumstances in your letter, on which you have asked for our views, appear to be a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to provide the following general comments, which may be of assistance.
1) Situation A
In your memorandum, you described the following situation (hereinafter, "Situation A"):
A corporation (the "Corporation") made the following acquisition and disposition of goodwill:
- In its 2000 taxation year, acquisition of goodwill at a cost of $1,000,000;
- In its 2002 taxation year, disposition of goodwill for proceeds of disposition of $2,000,000.
Furthermore, the Corporation claimed a total deduction of $101,325 under paragraph 20(1)(b) of the Act in computing its business income for the 2000 and 2001 taxation years.
You are of the view that an amount of $500,000 would be added to the Corporation's CDA in the situation described above under paragraph (c.2) of the definition of CDA in subsection 89(1) of the Act. You requested our views on the computation of the Corporation's CDA in the situation described above at the end of its 2002 taxation year.
For the purposes of our comments, we have assumed the following:
The Corporation is a "private corporation" as those terms are defined in subsection 89(1) of the Act.
The Corporation would have a taxation year ending December 31.
The only eligible capital expenditures and the only dispositions of eligible capital property made by the Corporation are those described above.
Since its incorporation, the only deductions that the Corporation claimed under paragraph 20(1)(b) of the Act in computing its business income are those described above.
No outlays or expenses were made or incurred by the Corporation with respect to the disposition of goodwill in 2002.
No amount received in the period by the Corporation would be required to be included in its income by reason of paragraph 12(1)(i.1) of the Act.
We are of the view that, in Situation A, the amounts determined under paragraphs (c), (c.1) and (c.2) of the definition of CDA at the end of the Corporation's 2002 taxation year would be computed as follows:
Paragraph (c) of the definition of CDA in subsection 89(1) of the Act: Nil.
In Situation A, the amount under paragraph (c) of the definition of CDA would be nil because no amount would be required to be included in the calculation of the Corporation's CEC by reason of the description of E in the definition of CEC in subsection 14(5) for a taxation year that ended before February 28, 2000.
Paragraph (c.1) of the definition of CDA in subsection 89(1) of the Act: Nil.
In Situation A, no amount would be required by paragraph 14(1)(b) of the Act to be included in computing the Corporation's income in respect of a business carried on by it for a taxation year that would be included in the period and that ended after February 27, 2000 and before October 18, 2000.
Paragraph (c.2) of the definition of CDA in subsection 89(1) of the Act: $500,000.
= the total of all amounts required by paragraph 14(1)(b) to be included in computing the Corporation's income in respect of its business for the 2001 and 2002 taxation years.
In order to determine the amount that was required by paragraph 14(1)(b) to be included in computing the Corporation's income in respect of its business for the 2002 taxation year in Situation A, the amount of the "excess" referred to in paragraph 14(1) must first be computed as follows:
= ( variable E in the definition of cumulative eligible capital ("CEC") in subsection 14(5) + variable F in the definition of CEC) ( minus ( variables A, B, C and D in the definition of CEC (
= ( 3/4 of the proceeds of disposition of goodwill for the 2002 taxation year + the amounts deducted under paragraph 20(1)b) in the 2000 and 2001 taxation years( minus ( 3/4 of the eligible capital expenditures made in the 2000 taxation year + variables B, C and D in the definition of CEC (
= ( (3/4 x $2,000,000) + $101,325 ( - ( (3/4 x $1,000,000) + Nil + Nil + Nil (
= ( $1,500,000 + $101,325 ( - ( ($750,000 + Nil + Nil + Nil) (
= ( $1,601,325 + $101,325 ( - ( $750,000 (
= $851,325
Based on the above, the amount that was required by paragraph 14(1)(b) to be included in computing the Corporation's income in respect of its business for the 2002 taxation year would be determined as follows in Situation A:
= 2/3 x (the "excess" - variable F in the definition of CEC - variables C and D in paragraph 14(1)(b))
= 2/3 x ($851,325 minus the amounts deducted under paragraph 20(1)(b) in the 2000 and 2001 taxation years minus variables C and D in paragraph 14(1)(b))
= 2/3 x ($851,325 - $101,325 - Nil - Nil)
= 2/3 x ($750,000)
= $500,000
Consequently, we agree with you that the amount under paragraph (c.2) of the definition of CDA would be $500,000 at the end of the Corporation's 2002 taxation year. Furthermore, it is our view that, in the situation described above, such amount of $500,000 added to the CDA of the Corporation could be paid out as a capital dividend only in the 2003 taxation year of the Corporation (i.e. in a taxation year subsequent to the taxation year in which the disposition of goodwill occurred).
3) Situation B
In your memorandum, you also described the following situation (hereinafter, "Situation B"):
A corporation (the "Corporation") has a taxation year ending December 31.
The Corporation made the following transactions:
- In a pre-1972 taxation year, acquisition of a right or licence at a cost of $30,000 (the fair market value to the Corporation of such right or licence as at December 31, 1971 was $148,000);
- In its 1982 taxation year, disposition of such right or licence for proceeds of disposition of $448,000;
- In its 1982 taxation year, acquisition of goodwill at a cost of $60,000.
- In its 1983 taxation year, acquisition of goodwill at a cost of $107,000.
- In its 2001 taxation year, disposition of goodwill for proceeds of disposition of $115,000.
Furthermore, you are of the view that, in Situation B, an amount of $120,000 would have been included in computing the Corporation's income at the end of its 1982 taxation year under subsection 14(1) of the Act. This seems to be based on the fact that the amount received by the Corporation from the disposition of the right or licence in the 1982 taxation year would, in your view, be deemed to be $300,000 for the purposes of section 14 under subsection 21(1) of the Income Tax Application Rules ("ITAR").
You also indicated that, in Situation B, the Corporation claimed a total deduction of $18,400 under paragraph 20(1)(b) of the Act in computing its business income for the taxation years ending before the Corporation's adjustment time. You also indicated that the Corporation claimed a total deduction of $30,500 under paragraph 20(1)(b) of the Act in computing its business income for the taxation years ending after the Corporation's adjustment time.
You are of the view that an amount of $66,500 would be added to the Corporation's CDA in the situation described above under paragraph (c) of the definition of CDA in subsection 89(1) of the Act at the end of the Corporation's 2001 taxation year. You are also of the view that an amount of $22,400 would be added to the Corporation's CDA in Situation B under paragraph (c.2) of the definition of CDA in subsection 89(1) of the Act at the end of the Corporation's 2001 taxation year.
You also raised the concern that in Situation B, the 1983 acquisition cost of 50% of $107,000 ($53,500) is taken into account twice when determining the CDA. More specifically, you are of the view that this amount of $53,500 is taken into account in the calculation of the amount required by paragraph 14(1)(b) to be included in computing the Corporation's income. Such amount is picked up by paragraph (c.2) of the definition of CDA in subsection 89(1) of the Act. You also believe that this amount of $53,500 is taken into account a second time when deducting the acquisition cost for the purpose of paragraph (c) of the definition of CDA in subsection 89(1) of the Act. Consequently, you are of the view that the Corporation's CDA could actually be higher in Situation B because of the fact that the acquisition costs appear to have been deducted twice.
You requested our views on the computation of the Corporation's CDA in the situation described above at the end of its 2001 taxation year and whether the concern you raised is an issue when determining a corporation's CDA in a similar situation.
For the purposes of our comments, we have assumed the following:
The Corporation is a "private corporation" as those terms are defined in subsection 89(1) of the Act.
The only eligible capital expenditures and the only dispositions of eligible capital property made by the Corporation are those described above.
Since its incorporation, the only deductions that the Corporation claimed under paragraph 20(1)(b) of the Act in computing its business income are those described above.
No capital dividend was ever paid by the Corporation to its shareholders on any class of shares of its capital stock.
No outlays or expenses were made or incurred by the Corporation with respect to the dispositions of goodwill in 1982 and 2001.
The right or licence acquired by the Corporation in a pre-1972 taxation year and disposed of in the 1982 taxation year would have constituted a "government right" as those terms are defined in subsection 21(3) of the ITAR.
No amount received in the period by the Corporation was required to be included in its income by reason of paragraph 12(1)(i.1) of the Act. Furthermore, no amount was deducted by the Corporation in its income under subsection 20(4.2) of the Act.
We are of the view that, in Situation B, the amounts determined under paragraphs (c), (c.1) and (c.2) of the definition of CDA at the end of the Corporation's 2001 taxation year would be computed as follows:
Paragraph (c) of the definition of CDA in subsection 89(1) of the Act: $64,260.
= the total of all amounts each of which is an amount required to have been included under this paragraph as it read for its application to a taxation year that ended before February 28, 2000
= ( ((1/2 of the proceeds of disposition of goodwill for taxation years that ended before February 28, 2000 and preceding adjustment time) minus (the Corporation's CEC at the commencement of the period + 1/2 of the eligible capital expenditures made before the adjustment time)) + (1/3 x 3/4 of the proceeds of disposition of goodwill for taxation years that ended before February 28, 2000 and following adjustment time) ( minus ( 1/4 of the eligible capital expenditures made in taxation years that ended before February 28, 2000 and after adjustment time (
= ( ((1/2 x $295,520) - (Nil + (1/2 x ($60,000 + $107,000)) + Nil ( - ( Nil (
= ( ($147,760 - $83,500) + Nil ( - ( Nil (
= ( 64,260 + Nil ( - ( Nil (
= $64,260
The difference between the amount you computed under paragraph (c) of the definition of CDA at the end of the Corporation's 2001 taxation year ($66,500) and the amount of $64,260 indicated above appears to be caused by the amount determined under subsection 21(1) of the ITAR as having been received by the Corporation from the disposition of the right or licence in the 1982 taxation year. We are of the view that such amount would be deemed to be $295,520 under subsection 21(1) of the ITAR, instead of $300,000 (i.e. ( 90% x ($448,000 - $403,200) ( + ( (90 % x $448,000) - $148,000 ( ).
Paragraph (c.1) of the definition of CDA in subsection 89(1) of the Act: Nil.
In Situation B, no amount would be required by paragraph 14(1)(b) of the Act to be included in computing the Corporation's income in respect of a business carried on by it for a taxation year that would be included in the period and that ended after February 27, 2000 and before October 18, 2000.
Paragraph (c.2) of the definition of CDA in subsection 89(1) of the Act: $22,400.
= the amount required by paragraph 14(1)(b) to be included in computing the Corporation's income in respect of its business for the 2001 taxation year.
In order to determine the amount that was required by paragraph 14(1)(b) to be included in computing the Corporation's income in respect of its business for the 2001 taxation year in Situation B, the amount of the "excess" referred to in paragraph 14(1) must first be computed as follows:
= ( variable E in the definition of cumulative eligible capital ("CEC") in subsection 14(5) + variable F in the definition of CEC) ( minus ( variables A, B, C and D in the definition of CEC (
= ( (3/4 of the proceeds of disposition of goodwill for the 2001 taxation year) + the amounts deducted under paragraph 20(1)b) in the taxation years ending after adjustment time ( minus ( (3/4 of the eligible capital expenditures made in the taxation years ending after adjustment time) + amounts included under paragraph 14(1)(b) in the Corporation's income in previous taxation years + (3/2 of the Corporation's CEC at the adjustment time) + (amounts deducted under paragraph 20(1)(b) in taxation years ending before adjustment time minus amounts included under subsection 14(1) in the Corporation's income for taxation years ending before adjustment time (
= ( (3/4 x $115,000) + $30,500 ( - ( Nil + Nil + (3/2 x $35,100) + ($18,400 - $117,760)(
= ( $86,250 + $30,500 ( - ( Nil + Nil + $52,650 + Nil) (
= ( $116,750 ( - ( $52,650 (
= $64,100
Based on the above, the amount that was required by paragraph 14(1)(b) to be included in computing the Corporation's income in respect of its business for the 2001 taxation year would be determined as follows in Situation B:
= 2/3 x (the "excess" - variable F in the definition of CEC - variables C and D in paragraph 14(1)(b))
= 2/3 x ($64,100 minus the amounts deducted under paragraph 20(1)b) in the taxation years ending after adjustment time minus variables C and D in paragraph 14(1)(b))
= 2/3 x ($64,100 - $30,500 - Nil - Nil)
= 2/3 x ($33,600)
= $22,400
Consequently, we agree with you that the amount of CDA under paragraph (c.2) of the definition of CDA would be $22,400 at the end of the Corporation's 2001 taxation year. Furthermore, it is our view that, in the situation described above, such amount of $22,400 added to the CDA of the Corporation could be paid out as a capital dividend only in the 2002 taxation year of the Corporation (i.e. in a taxation year subsequent to the taxation year in which the disposition of goodwill occurred).
With respect to the concern you raised regarding the double deduction of an amount in the computation of the CDA in Situation B, please note that, in the past, we have informed officials from the Department of Finance on the application of the CDA rules in situations similar to Situation B described above. However, should you wish to pursue your tax policy concern further, you may contact the Tax Policy Branch of the Department of Finance by writing to: L'Esplanade Laurier, 140 O'Connor Street, Ottawa, Ontario, K1A 0G5.
We trust that our comments will be of assistance. However, as stated in paragraph 22 of Information Circular 70-6R5, the opinion expressed in this letter is not a ruling and consequently is not binding on the Canada Customs and Revenue Agency.
Yours truly,
Maurice Bisson, CGA
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2003
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2003
Email this Content