1 February 2000 External T.I. 1999-0008645 - CALCULATION OF 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Computation of capital dividend account for dispositions of eligible capital property subject to ITAR 21(1). Does excess of actual POD over deemed POD get added to capital dividend account?

Position: No.

Reasons: The law.

XXXXXXXXXX 		1999-000864

Attention: XXXXXXXXXX

February 1, 2000

Dear Sirs:

Re: Calculation of Capital Dividend Account

This is in reply to your letter dated September 24, 1999, wherein you requested our views on the computation of a corporation's "capital dividend account" as that term is defined in subsection 89(1) of the Income Tax Act (the "Act") in the following situation.

In your letter you describe a situation where a corporation had goodwill which it acquired prior to 1971 and which it sold in 1977. Pursuant to subsection 21(1) of the Income Tax Application Rules (the "ITAR") for the purposes of section 14 of the Act the actual proceeds of disposition arising on the sale of the goodwill (the "actual POD") are reduced to 65% of the actual amount (the "deemed POD"). The corporation, pursuant to the rules in section 14 of the Act, included 50% of the deemed POD in its income in 1977. Your question is whether for the purpose of determining the addition to the corporation's capital dividend account for the "untaxed portion" in respect of such a disposition, the corporation should use the deemed POD or the actual POD.

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70 6R3 (IC-70-6R3) dated December 30, 1996. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. Notwithstanding the above we can offer the following comments.

In situations where ITAR 21(1) applies the taxpayer's actual proceeds of disposition are reduced using the relevant percentage applicable such that the reduced amount of proceeds of disposition are deemed to be the taxpayer's proceeds of disposition for the purpose of section 14. As a result, a corporate taxpayer's deemed proceeds of disposition under ITAR 21(1) must be used to determine the amount included in its capital dividend account under paragraph 89(1)(c) of the Act. Therefore, while the difference between the corporation's actual POD and deemed POD is not subject to income tax, this "untaxed portion" does not increase the corporation's capital dividend account (see paragraph 17 of former IT-123R4 dated May 30, 1985).

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch

??

- 2 -