11 June 2007 External T.I. 2006-0185291E5 - Capital Dividend Account

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.

Principal Issues: Whether a gain originally reported by a corporation as a capital gain, in a taxation year in respect of which the normal reassessment period has now expired, can be recharacterized as an income gain when reviewing the capital dividend account balance relevant to a capital dividend election in a subsequent taxation year.

Position: Yes; subject, generally, to the normal reassessment period relevant to the subsequent taxation year.

Reasons: In accordance with the definition of capital dividend account in subsection 89(1) which provides for a cumulative determination which may span several taxation years.

								2006-018529
XXXXXXXXXX 							A.A. Cameron
(613) 347-1361
June 11, 2007

Dear XXXXXXXXXX:

Re: Capital Dividend Account

We are writing further to your letter of May 3, 2006 requesting a technical interpretation regarding the determination of the amount of a corporation's capital dividend account ("CDA") within the meaning given to that term in subsection 89(1) of the Income Tax Act (the "Act"). We apologize for the delay in responding to your letter.

You refer to a hypothetical situation where a corporation, which is a "Canadian-controlled private corporation" and is resident in Canada for purposes of the Act, has a balance in its CDA that has arisen in respect of amounts reported by the corporation as capital gains on its income tax returns for prior taxation years, which are now "statute barred". In the current taxation year, the directors of the corporation wish to pay a dividend in respect of which an election under subsection 83(2) of the Act would be made to treat it as a capital dividend based upon the balance in the corporation's CDA that arose with regard to the amounts previously reported and assessed as capital gains. You have asked whether, in reviewing the above election, the Canada Revenue Agency (the "Agency") would be able, essentially, to deny an addition to the corporation's CDA, in respect of an amount originally characterized as a capital gain in a previous taxation year that is now statute barred, for amounts that may be considered to be on income account.

Our Comments

Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular 70-6R5 dated May 17, 2002 issued by the Agency. A fee is charged for this service. The referenced Information Circular and other Agency publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Although, we are unable to provide any comments with respect to a particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.

The rules for determining the balance in the CDA of a corporation are provided in the definition of that term in subsection 89(1) of the Act. As noted in paragraph 6 of Interpretation Bulletin IT-66R6 Capital dividends, the components of the CDA are calculated on a cumulative basis for a particular period, which starts at the beginning of the first taxation year that began after the corporation last became a private corporation and ending after 1971, and ends immediately before the particular time that the CDA balance is being determined. Where a private corporation elects in accordance with subsection 83(2) of the Act to have the full amount of a dividend treated as a capital dividend, paragraph 83(2)(a) requires that a determination be made of the corporation's CDA balance immediately before the time that the dividend becomes payable. Until such time as a capital dividend has been paid, the components of the CDA would not be subject to a "normal reassessment period" (as determined under subsection 152(3.1) of the Act) with respect of a particular taxation year of the corporation. In other words, the Agency may adjust the amount of a capital gain, which arose in a year that is outside of the relevant normal reassessment period, for the purposes of determining the CDA balance in respect of a dividend paid in a taxation year that is within the normal reassessment period for that year.

We trust that our comments, which are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5, are of assistance. Furthermore, our comments do not address whether the reported capital gains may be subject to a reassessment under subparagraph 152(4)(a)(i) of the Act.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch