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Principal Issues:
Whether the method for computing the capital dividend account of a corporation with respect to the disposition of an eligible capital property has been changed in respect of taxation years that end after February 27, 2000.
Position:
Yes. Only an amount included in a corporation's income pursuant to paragraph 14(1)(b) at the end of a taxation year that ends after February 27, 2000 is taken into account in the computation of the corporation's capital dividend account.
Reasons:
Pursuant to paragraphs (a) and (c) modified and new paragraphs (c.1) and (c.2) of the definition of capital dividend account in subsection 89(1) of the Act.
December 21, 2001
Quebec Tax Services Office Headquarters
Corporate Reorganizations and Resource
Industries Section
Client Services Section 471-0-2
Attention: Mr. Dominique Lavallée Fouad Daaboul
(613) 957-2053
2001-008924
T2054 elections subject to new subparagraphs (c.1)(i) and (c.2)(i) of the definition of "capital dividend account” in subsection 89(1) of the Income Tax Act
This is in response to your memorandum of June 15, 2001, in which you requested our opinion on the subject of the situations described below. We apologize for the delay in responding to your request.
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Legal background
The relevant excerpts from subsection 14(1) and the definition of "capital dividend account" in respect of "eligible capital property" that appear to us to be relevant to your request are as follows:
Eligible capital property — inclusion in income from business
14 (1) Where, at the end of a taxation year, the total of all amounts each of which is an amount determined, in respect of a business of a taxpayer, for E in the definition cumulative eligible capital in subsection (5) (in this section referred to as an “eligible capital amount”) or for F in that definition exceeds the total of all amounts determined for A to D in that definition in respect of the business (which excess is in this subsection referred to as “the excess”), there shall be included in computing the taxpayer’s income from the business for the year the total of
(a) the amount, if any, that is the lesser of
- (i) the excess, and
- (ii) the amount determined for F in the definition cumulative eligible capital in subsection (5) at the end of the year in respect of the business, and
(b) the amount, if any, determined by the formula
2/3 × (A - B - C - D)
where
A is the excess,
B is the amount determined for F in the definition cumulative eligible capital in subsection (5) at the end of the year in respect of the business,
C is 1/2 of the amount determined for Q in the definition cumulative eligible capital in subsection (5) at the end of the year in respect of the business, and
D is the amount claimed by the taxpayer, not exceeding the taxpayer’s exempt gains balance for the year in respect of the business.
89(1) Definitions...
capital dividend account of a corporation at any particular time means the amount, if any, by which the total of
(a) the amount, if any, by which
(i) the total of all amounts each of which is the amount if any, by which
(A) the amount of the corporation’s capital gain from a disposition (other than a disposition that is the making of a gift after December 8, 1997 that is not a gift described in subsection 110.1(1)) of a property in the period beginning at the beginning of its first taxation year (that began after the corporation last became a private corporation and that ended after 1971) and ending immediately before the particular time (in this definition referred to as “the period”)
...
(c) the total of all amounts each of which is an amount required to have been included under this paragraph as it read in its application to a taxation year that ended before February 28, 2000,
(c.1) the amount, if any, by which
(i) 1/2 of the total of all amounts each of which is an amount required by paragraph 14(1)(b) to be included in computing the corporation’s income in respect of a business carried on by the corporation for a taxation year that is included in the period and that ended after February 27, 2000 and before October 18, 2000,
exceeds
(ii) where the corporation has deducted an amount under subsection 20(4.2) in respect of a debt established by it to have become a bad debt in a taxation year that is included in the period and that ended after February 27, 2000 and before October 18, 2000, or has an allowable capital loss for such a year because of the application of subsection 20(4.3), the amount determined by the formula
V + W
where
V is 1/2 of the value determined for A under subsection 20(4.2) in respect of the corporation for the last such taxation year that ended in the period, and
W is 1/3 of the value determined for B under subsection 20(4.2) in respect of the corporation for the last such taxation year that ended in the period, and
(iii) in any other case, nil,
(c.2) the amount, if any, by which
(i) the total of all amounts each of which is an amount required by paragraph 14(1)(b) to be included in computing the corporation’s income in respect of a business carried on by the corporation for a taxation year that is included in the period and that ends after October 17, 2000,
exceeds
(ii) where the corporation has deducted an amount under subsection 20(4.2) in respect of a debt established by it to have become a bad debt in a taxation year that is included in the period and that ends after October 17, 2000, or has an allowable capital loss for such a year because of the application of subsection 20(4.3), the amount determined by the formula
X + Y
where
X
is the value determined for A under subsection 20(4.2) in respect of the corporation for the last such taxation year that ended in the period, and
Y
is 1/3 of the value determined for B under subsection 20(4.2) in respect of the corporation for the last such taxation year that ended in the period, and
(iii) in any other case, nil,
(Emphasis added)
Situation 1
A corporation (Aco) filed an election on Form T2054 under subsection 83(2) (the "Election"), dated May 26, 2000, in respect of a dividend, out of its CDA computed as at May 26, 2000, payable on that date in the amount of $8,738,000. The total CDA determined on that date by the corporation is $8,738,212 based on the disposition of eligible capital property ("ECP") on May 2, 2000.
The corporation's taxation year-end is December 31. There are no other items that enter into the computation of the corporation's CDA.
Question 1
Given the amendments to the definition of CDA in subsection 89(1), as stated above, more specifically that new subparagraphs (c.1)(i) and (c.2)(i) of the definition of CDA state "... for a taxation year that is included in the period ...", is Aco correct in considering that, on May 26, 2000, its CDA was $8,736,212, even though its taxation year ended on December 31, 2000?
No. In our view, the corporation's CDA on May 26, 2000 was nil. Our position is based on the following findings.
A corporation's CDA is determined at a particular time. The "period" for which the CDA is computed is defined in clause (a)(i)(A) of the definition of CDA in subsection 89(1). This "period" begins at the beginning of the corporation's first taxation year (that began after the corporation last became a private corporation and that ended after 1971) and ends immediately before the particular time.
As you noted in your request, new subparagraphs (c.1)(i) and (c.2)(i) of the definition of CDA provide that one-half (or the total, in the case of c.2 )) of the total of all amounts each of which is an amount required by paragraph 14(1)(b) to be included in computing the corporation's income in respect of a business carried on by it for a taxation year that is included in the "period" and that ended after February 27, 2000 and before October 18, 2000 (ending after October 17, in the case of c.2)) may be included in the CDA at any time.
Furthermore, an amount may only be included in computing income pursuant to paragraph 14(1)(b) where, at the end of a taxation year, an "excess” is determined in accordance with subsection 14(1).
For the purposes of the Act, a corporation's "taxation year" is its "fiscal period" pursuant to paragraph 249(1)(a). In addition, subsection 249.1(1) provides that the fiscal period of a business or a property of a person means the period for which the person’s accounts in respect of the business or property are made up for purposes of assessment.
In our view, it follows from these provisions of the Act that any amount included in income pursuant to paragraph 14(1)(b) can only be determined at the end of a taxation year; that an amount may therefore only be included in the CDA for a particular "period", following the disposition of eligible capital property, in respect of a completed taxation year included in the period and that the quantum of the amount included in the CDA in respect of the disposition of eligible capital property is determined, not on the basis of the date of disposition of the eligible capital property, but on the basis of the date of the end of a corporation's taxation year.
Thus, for the purposes of calculating Aco's CDA on May 26, 2000, in this situation, the provisions of new paragraph (c.2) of the definition of CDA apply such that the amount of the CDA is nil on May 26, 2000 and potentially an amount of $13,107,000 on December 31, 2000, given the information provided.
Question 2
Does the wording of the text referred to in Question 1 above mean that, for the purposes of computing the CDA under new subparagraphs (c.1)(i) and (c.2)(i) of the definition of CDA, only data relating to taxation years that ended during the computation period must be considered?
Yes. As stated above, we are of the view that new subparagraphs (c.1)(i) and (c.2)(i) of the definition of CDA mean that only data relating to taxation years that ended during the CDA computation period must be considered.
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Situation 2
1. A corporation has a taxation year ending April 30.
2. A first Election was filed by the corporation on March 31, 1999, in the amount of $250, based on the sale of an ECP ("ECP-1") on December 1, 1998. The sale price of the ECP-1 was $1,000, while the amount of the corporation's CDAs since its incorporation was nil.
3. A second Election was filed on May 31, 2000, for an amount of $300, taking into account a capital gain of $1,200 from the disposition of a non-depreciable capital asset on March 30, 2000, for which the proceeds of disposition were $2,000 and the adjusted cost base was $800.
4. An ECE was made by the corporation on January 1, 2000 at a cost of $2,000.
Question 4
If the answer to question 2 is yes, does this mean that in Situation 2, the eligible capital expenditure (the "ECE") made on January 1, 2000, would not reduce the CDA balance, as computed in the May 31, 2000 election?
In fact, the ECE made on January 1, 2000 would not reduce the corporation's CDA on May 31, 2000, since the ECA would have been made after April 30, 1999 and no amount would be determined pursuant to paragraphs (c.1) or (c.2) of the definition of CDA. In this situation, the amount computed pursuant to paragraph (a) of the definition of CDA would be $400 and the amount computed pursuant to paragraph (c) of the definition of CDA would be $250. In addition, the dividend already paid as a result of the first election, i.e. $250, should reduce the CDA, for a net CDA amount of $400 on May 31, 2000.
Situation 3
1. A corporation (Cco) has a taxation year ending March 31 of each year.
2. A first Election was filed on January 31, 1999 following the sale of an ECP (ECP-1) for $100,000 on December 1, 1998, when the total amount of the corporation's CDA at that date was nil. A dividend equal to the amount of the CDA at that date was declared and paid.
3. An ECE of $60,000 was made by the corporation on February 1, 1999.
4. A second Election was filed on February 28, 1999 in respect of the disposition on February 4, 1999 of a non-depreciable capital property at a price of $200,000. The adjusted cost base of that property was $50,000. A dividend equal to the amount of the CDA on that date was declared and paid.
5. An ECP (ECP-2) was sold on March 15, 2000 for $180,000.
6. A third Election was filed by the corporation on April 1, 2000.
Question 5
What is the amount of the CDA on April 1, 2000?
You are of the view that, in this situation, the ECE made on February 1, 1999 would reduce the CDA twice. In fact, you are of the view that by virtue of paragraph (c) of the definition of CDA in subsection 89(1), the ECE of February 1, 1999 reduced the CDA a first time as computed at the time of the second election, February 28, 1999. In addition, you claim that, for the purposes of computing the amount to be included pursuant to subparagraph (c.1)(i) of the definition of CDA in subsection 89(1), paragraph 14(1)(b) must be considered and, based on the computation made pursuant to paragraph 14(1)(b), the ECE of February 1, 1999 reduces the amount to be included in income for the 2000 taxation year, and thereby the CDA, a second time.
We are of the view that what you consider to be a double deduction in the computation of the CDA, in practice, arises from the fact that both the computation of the cumulative eligible capital amount and the computation of the CDA are cumulative computations of gains and expenses or losses realized during a period ending at a particular time, and that the data used to compute the amount to be included under section 14 are also relevant for computing the CDA. For example, in the situation presented, not only is the ECE on February 1, 1999 taken into account in determining the amounts to be included pursuant to paragraphs (c) and (c.1) of the definition of CDA in subsection 89(1), but also the disposition of ECP-1 on December 1, 1998.
We are also of the view that, in Situation 3, the amount of the CDA of Cco on April 1, 2000 would be computed as follows:
Paragraph (a) of the definition of CDA in subsection 89(1)
February 4, 1999 capital gain: $150,000
Taxable capital gain: $112,500 $37,500
Paragraph (c) of the definition of CDA in subsection 89(1)
Amount to be included under (c) as it reads applicable to the taxation year ended March 31, 1999
(1/3 x $75,000) - (1/4 x $60,000) $10,000
Paragraph (c.1) of the definition of CDA in subsection 89(1)
1/2 x $120,000 (amount included in the corporation's income pursuant to 14(1)(b) for its taxation year ended on March 31, 2000) $60,000
Subtotal $107,500
Deduct :
January 31, 1999 dividend $25,000
Dividend of February 28, 1999 $22,500 $47,500
CDA balance at April 1, 2000 $60,000
=======
It should be noted that at the time of the Election filed on January 31, 1999 by Cco, the amount determined under paragraph (c) of the definition of CDA in subsection 89(1) was $25,000. At the time of the election filed on February 28, 1999, item (c) amounted to $10,000, since at that time the ECE made on February 1, 1999 by Cco must be taken into account.
We are also of the view that, for the purposes of applying paragraph (c) of the definition of CDA in subsection 89(1), it is necessary to compute "the total of all amounts each of which is an amount required to have been included under this paragraph as it read in its application to a taxation year that ended before February 28, 2000” at the end of the last taxation year that ended before February 28, 2000 of a particular corporation. Consequently, in Situation 3, the amount to be included pursuant to paragraph (c) of the definition of CDA in subsection 89(1) in computing Cco’s CDA as at April 1, 2000 would be $10,000, even though Cco had not made the February 28, 1999 Election.
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For your information, a copy of this memorandum will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the Legislative Access Bank version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
Should you require any additional information concerning this document, please do not hesitate to contact us.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and
Resource Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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