30 January 2004 Internal T.I. 2003-0051211I7 - Capital Dividend Account - Excess Dividends

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: Where 184(3) election made and the relevant income tax returns of the payor corporation are statute barred: i) Can the recipient corporation be assessed Part IV tax?; and ii) Can the payor corporation be reassessed with regard to dividend refund?

Position: i) Yes; ii) Generally not.

Reasons: i) As provided in subparagraph 184(4)(b)(ii). ii) Per subsection152(1.2), the ability to determine or redetermine a dividend refund is subject to the subsection 152(4) limitation with regard to the normal reassessment period.

January 30, 2004

Sudbury Taxation Centre Resource Industries Section
Corporation Returns Processing Section A.A. Cameron
(613) 347-1361
Attention: Leona Cote
2003-005121

Reassessments Relating to Dividend in Excess of Capital Dividend Account

We are writing further to your request, by electronic mail of December 1, 2003, for our written views with regard to certain questions relating to the above situation. In particular, our understanding of the situation and your questions is as follows:

1. A "private corporation", within the meaning assigned that term in subsection 89(1) of the Income Tax Act (the "Act"), makes an election pursuant to subsection 83(2) of the Act, within the time limit specified in that provision, in respect of the full amount of a dividend that has become payable by it.

2. It is ultimately determined that the full amount of this dividend exceeded the balance in the corporation's "capital dividend account" ("CDA"), within the meaning of subsection 89(1) of the Act, immediately before the dividend became payable.

3. The corporation is assessed tax under Part III of the Act, pursuant to subsection 184(2), on the amount by which the full amount of the dividend exceeds the portion thereof deemed to be a capital dividend under paragraph 83(2)(b) of the Act. In other words, Part III tax is assessed on the excess of the full amount of the dividend over the balance in the corporation's CDA immediately before the dividend became payable (the "Excess").

4. The corporation makes an election in pursuant to subsection 184(3) of the Act within the time limit specified in that provision, i.e., within 90 days of the mailing of the notice of assessment in respect of the Part III tax otherwise payable.

5. Each of the corporation's shareholders that received any portion of the dividend encompassed in the Excess concurs with the corporation making the election under subsection 184(3) of the Act. Those shareholders are either individuals or corporations and have agreed to the inclusion of their respective portions of the Excess [determined in accordance with subparagraph 184(3)(d)(ii) of the Act] as a separate taxable dividend in the determination of their income for the taxation year in which the dividend was paid.

6. You have indicated that the situation with which you are concerned is one where the relevant income tax returns of the corporation, i.e., the relevant T2 returns, are "statute barred" and the corporation has filed an election under subsection 184(3) of the Act to treat the Excess as a separate taxable dividend. In particular, you have asked whether in such a situation:

i) you can "reassess the recipient corporation to revise the Schedule 3 to reallocate the dividends received to assess Part IV tax";

ii) you can "reassess the payor corporation to revise Schedule 3 to reallocate the dividends paid for purposes of the dividend refund"; and

iii) "any refund resulting from an adjustment to the payor corporation return [would] become a statute barred refund?"

Our Comments

In a situation such as you have described, where all the shareholders receiving any portion of the Excess otherwise subject to Part III tax concur with the filing of the election under subsection 184(3) of the Act, subparagraph 184(4)(b)(ii) thereof provides, in part, that:

...notwithstanding subsections 152(4) to (5), such assessment of the tax, interest and penalties payable by each such shareholder for any taxation year may be made as is necessary to take the corporation's election into account.

As such, reassessment of a relevant taxation year of a recipient corporation for Part IV tax arising from treating its portion of the Excess as a separate taxable dividend could be made in accordance with the provisions of subparagraph 184(4)(b)(ii) of the Act notwithstanding the limitations contained in subsections 152(4) to (5) thereof.

With regard to the payor corporation in the above situation, as a result of a valid election under subsection 184(3) of the Act being made, an "excess" subject to tax under Part III of the Act will no longer exist with respect to the election under subsection 83(2) of the Act [pursuant to paragraph 184(3)(a) of the Act], and a taxable dividend in an amount equal to the Excess will be considered to have become payable at the time the dividend in question originally became payable [pursuant to paragraph 184(3)(c) of the Act].

Pursuant to subsection 185(3) of the Act certain provisions from Part I thereof, including subsection 152(4), are applicable to Part III of the Act "with such modifications as the circumstances require." As such, in the absence of the application of a provision of the Act expressly providing otherwise (such as those in respect of objections or appeals), the ability to reassess the payor corporation with regard to Part III tax will be subject to the provisions of 152(4) of the Act (modified as noted in the preceding sentence). Therefore, where the situation does not involve "misrepresentation", "fraud", or a "waiver" having been filed by the payer corporation, as contemplated in paragraph 152(4)(a) of the Act (and given our understanding that these would not be situations to which the three year extension provided for in paragraph 152(4)(b) thereof would be relevant), a reassessment of the payor corporation with regard to Part III tax could generally not be made after the "normal reassessment period" relevant to the assessment of such tax in respect of the election under subsection 83(2) of the Act.

However, it should be noted that in applying the provisions of subsection 152(4) of the Act for purposes of Part III thereof, the "normal reassessment period" would be calculated from the date of the original assessment of the tax under that Part, i.e., a three or four year period, as the case may be, commencing on that date. While this date may be the same as the date of the original assessment of the tax under Part I, it should also be noted that subsection 185(1) of the Act provides for the assessment of the tax under Part III thereof after the election under subsection 83(2) of the Act has been examined. While the former subsection provides that this examination is to be made "with all due dispatch", the amount of time needed to fulfill such requirement will depend upon the facts relevant to a particular situation.

As a result of the election under subsection 184(3) of the Act, the question also arises as to whether adjustments may be made to the payor corporation to reallocate the taxable dividend considered to have become payable in relation to the Excess for purposes of the "dividend refund" [as defined in paragraph 129(1)(a) of the Act]. Pursuant to subsection 152(1) of the Act, the Minister is required, inter alia, to examine a taxpayer's return of income for a taxation year, assess the tax for the year and determine, among other things, "the amount of refund, if any, to which the taxpayer may be entitled by virtue of section 129" of the Act for the year. [Note that, pursuant to the preamble to subsection 129(1) of the Act, a dividend refund may only arise in respect of a taxation year where a return of the corporation's income under Part I of the Act for that taxation year is made within three years after the end of such year.]

In accordance with subsection 152(1.2) of the Act, the provisions of Division I "as they relate to an assessment or a reassessment and to assessing or reassessing tax, apply, with such modifications as the circumstances require, to a determination or redetermination of an amount under" that Division (i.e., such provisions apply to a determination or redetermination of the amount of a dividend refund). As such, in the absence of the application of a provision of the Act expressly providing otherwise, the Minister's ability to make a determination or redetermination of a dividend refund for a particular taxation year would be subject to the provisions of subsection 152(4) of the Act (modified as the circumstances require). Therefore, as discussed above in the context of Part III of the Act, where the situation does not involve circumstances contemplated in paragraphs 152(4)(a) or (b) of the Act, a determination or redetermination of the dividend refund of the payor corporation for a particular taxation year could generally not be made after the relevant "normal reassessment period" for that year. In other words, notwithstanding that a taxable dividend equal to the Excess may be deemed to have become payable in respect of a particular taxation year under paragraph 184(3)(c) of the Act, a redetermination of the dividend refund of the payor corporation for that taxation year appears to be precluded under the Act.

We would note in passing that, pursuant to paragraph 600(b) to the Income Tax Regulations, each of subsections 83(2) and 184(3) of the Act is a "prescribed provision" for purposes of paragraph 220(3.2)(a) of the Act. As such, where an election by the corporation under either of subsections 83(2) or 184(3) of the Act was not made within the applicable time limits, the Minister of National Revenue may, on application by the corporation, extend the time for making either such election.

In our view, where the time for filing an election under 184(3) of the Act has been extended under subsection 220(3.2), reassessment of a recipient corporation for Part IV tax arising from treating its portion of the Excess as a separate taxable dividend and reassessment of the payor corporation to take into account adjustments to its dividend refund as a result of such dividend, would be in accordance with the provisions of subsection 220(3.4) of the Act.

If we can be of further assistance with regard to this matter, please contact the writer.

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch