CRA substantially expands on its Bulletin on capital dividends

There are various comments in the CRA Folio on capital dividends which did not appear in IT-66R6, including:

• A recipient of a capital dividend need not be a shareholder provided it was a shareholder on the record date.
• Negative ACB gains of partners are not added to their CDA.
• A partner adds its share of a capital dividend to its CDA at the time of partnership receipt “if the partnership agreement provides that [such] partner is entitled to a share of a capital dividend at the time the dividend is received by the partnership.”
• Where a death benefit is paid pursuant to a creditor’s group life term policy, the full amount of the death benefit (as opposed to the net proceeds) can be added to the debtor’s CDA - whereas only the net proceeds of a life insurance policy owned by the debtor as policyholder may be added to the debtor’s CDA.
• CRA provides a numerical example illustrating that Amalco has a memory of the excess capital losses of a predecessor, which do not reduce the other CDA components, but which must first be filled before there is a component (a) to Amalco’s CDA.
• After describing various ways in which a CDA deficiency relative to a capital dividend can arise, CRA notes its policy in 2013-0504951E5 that an election to convert an excessive capital dividend into a taxable dividend can be held in abeyance until an objection respecting whether there, in fact, should have been a reduction to the CDA has been dealt with.
• CRA agrees with Groupe Honco that, under s. 83(2.1), a person can have more than one main reason for the acquisition of shares.

Neal Armstrong. Summaries of S3-F2-C1 under s. 83(2), s. 89(1) – capital dividend account – para. (a), s. 89(1) – capital dividend account – para. (b), s. 89(1) – capital dividend account – para. (d), s. 87(2)(z.1), s. 184(3) and s. 83(2.1).