Morrissette – Tax Court decision casts doubt on the s. 184(3) short-cut method

In 2011-0412071C6 F, CRA indicated that if the corporation informs the local Tax Services Office that it wishes s. 184(3) to apply, the TSO will apply the "short-cut” method under which no Part III assessment will be issued to the corporation and only the shareholders will be reassessed to include the taxable dividends in their income.

That is more-or-less what happened here. However, the taxpayer then appealed the assessment of the taxable dividend arising to him pursuant to the s. 184(3) election on the ground that the purported capital dividend paid to him by the corporation in fact was a valid capital dividend – and stating that he only agreed to make the election in order to avoid a punitive assessment of his corporation for Part III tax on the supposedly excess dividend. The Crown moved to have the taxpayer’s appeal struck on the grounds that it disclosed no reasonable cause of action (he was bound by his election).

Smith J dismissed the Crown’s motion, stating that he “cannot gloss over a legislative provision which requires the Minister to make an assessment permitting the taxpayer to then make an election” - i.e., a valid s. 184(3) election requires a preceding Part III tax assessment. Although this strongly suggests that the Minister’s assessment based on a void s. 184(3) election was also void, he noted that all that was necessary for him to determine was that the Crown had not established that the taxpayer’s appeal had no reasonable prospect of success.

His finding nonetheless suggests that other assessments made pursuant to assessments of taxable dividends made on the basis of the short-cut method could be attacked as being void if timely proceedings were brought.

Neal Armstrong. Summaries of Morrissette v. The Queen, 2019 CCI 103 under s. 184(3) and Tax Court Rules s. 53(1)(c).