14 February 2002 External T.I. 2002-0121625 - Capital Dividend Account - Trust dist.

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: Whether the effective date for paragraph (f) of "capital dividend account" in subsection 89(1) limits the inclusion of non-taxable capital gains of a trust to those realized by a trust after 1996.

Position: No, the effective date is only concerned with dividends of the corporation payable after 1997.

Reasons: The law - The effective date provision is clear on its face.

2002-012162
XXXXXXXXXX Marc Edelson
(613) 957-2123
February 14, 2002

Dear XXXXXXXXXX:

Re: Subsection 89(1) "Capital Dividend Account" of the Income Tax Act (the "Act")

We are writing in reply to your letter of January 28, 2002 wherein you requested our opinion regarding the operation of paragraph (f) of the definition of "capital dividend account" in subsection 89(1) of the Act (all further statutory references in this letter are to the Act).

The situation in your letter may be briefly described as follows:

Paragraph (f) of the definition of "capital dividend account" in subsection 89(1) of the Act was added by S.C. 2001, c. 17, s. 67(3), "applicable to elections in respect of capital dividends that become payable after 1997" (herein called the "transitional provision"). Your question is whether the non-taxable portion of capital gains realized by a trust before 1998 could be included in the calculation of the capital dividend account of a corporation as a result of the operation of the said paragraph (f).

Your request appears to relate to 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 70-6R4 ("IC-70-6R4") dated January 29, 2001. 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. We can, however, provide the following general comments.

The transitional provision relating to new paragraph (f) of the definition of "capital dividend account" in subsection 89(1) of the Act states that it is "applicable to elections in respect of capital dividends that become payable after 1997." The focus of the transitional provision is, therefore, on the date that a dividend becomes payable in respect of which an election is made for the dividend to be deemed a capital dividend (within the meaning of subsection 83(2) of the Act). In respect of any such dividend payable after 1997, the corporation may include in the calculation of its capital dividend account the appropriate amount determined under the said paragraph (f) on account of all amounts distributed by one or more trusts in its favor during "the period", as that term is defined in paragraph (a) of the definition of "capital dividend account".

Our comments are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R4.

Yours truly,

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