29 November 2002 External T.I. 2002-0118665 - Excess Portion of Capital Dividend

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 CCRA.

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

Principal Issues: Treatment of amount of 83(2) dividend in excess of CDA

Position: Non-taxable receipt; added to CDA of corporate shareholders

Reasons: the Act

XXXXXXXXXX 	2002-011866
		Fiona Francis
November 29, 2002

Dear XXXXXXXXXX:

Re: Technical Interpretation - Excess portion of capital dividend

This is in your reply to your letter of January 9, 2002 wherein you requested our comments concerning a hypothetical situation involving the payment of capital dividends.

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not the Income Tax Rulings Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its views. However, we are prepared to offer the following general comments that may be of assistance.

The situation that you have outlined is as follows:

? Aco is a Canadian-controlled private corporation.

? Aco calculated its capital dividend account ("CDA") at a particular time to be $1,000. Aco declared and paid a dividend of $1,000, pursuant to the rules contained in subsection 83(2) of Income Tax Act (Canada) ("the Act").

? Subsequently it was determined that the CDA was actually $900 immediately before the time the dividend was paid. Aco was liable for a tax, pursuant to subsection 184(2) of the Act, equal to 75% of the portion of the dividend paid in excess of the balance in the CDA (such excess referred to herein as the "Excessive Amount").

It is your view that the Excessive Amount is considered to be a taxable dividend under the Act and will be included in the income of a shareholder of Aco. Furthermore, you believe that the Excessive Amount will not be included in the CDA of a shareholder of Aco that is a Canadian-controlled private corporation. Therefore, you conclude that the tax under Part III of the Act is unreasonable.

OUR COMMENTS

Unless an election is made under subsection 184(3) of the Act, the Excessive Amount will not be considered as a taxable dividend and will not be included in computing the income of a shareholder resident in Canada. "Taxable dividend" has the meaning assigned by subsection 89(1) and means a dividend other than (a) a dividend in respect of which the corporation paying the dividend has elected in accordance with subsection 83(2), and (b) certain qualifying dividends paid by a public corporation. Under subsection 83(2), a corporation is required to elect in respect of the full amount of the dividend. Although paragraph 83(2)(a) deems the dividend to be a capital dividend to the extent of the corporation's CDA immediately before that time, it does not deem the Excessive Amount to be a taxable dividend.

Moreover, the full amount of the dividend received by a corporate shareholder of Aco, including the Excessive Amount, will be included in the calculation of that corporation's CDA, unless the election is made under subsection 184(3). CDA is defined in subsection 89(1) of the Act. Paragraph (b) of that definition includes dividends received by a corporation that are not included in the corporation's income by virtue of subsection 83(2) of the Act. Paragraph 83(2)(b) provides that no part of the dividend, in respect of which the election under subsection 83(2) is made, is included in the recipient's income. Therefore, both the capital dividend and the Excessive amount are included in the CDA calculation of a shareholder of Aco that is a corporation.

As an alternative to the payment of tax under subsection 184(2) of the Act, Aco, with the concurrence of every shareholder entitled to the dividend, may elect under subsection 184(3) of the Act to have the Excessive Amount treated as a separate taxable dividend. Where a valid election under subsection 184(3) is made, each shareholder of Aco that is resident in Canada and is entitled to receive a proportionate share of the actual dividend is deemed to receive a share of each deemed separate dividend proportionate to the shareholder's holdings of the particular class of shares at that time. Where the shareholder is a corporation, only the amount of the deemed separate capital dividend pursuant to paragraph 184(3)(a) of the Act will be added to that corporation's CDA.

The above comments represent our general view with respect to the subject matter and are not binding on the CCRA, as explained in paragraph 22 of Information Circular 70-6R5. We trust that the foregoing will be of assistance to you.

Yours truly,

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