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: Computation of a corporation's capital dividend account ("CDA") in a given fact situation.
Position: No amount would be included in the corporation's CDA under paragraph (c) of the definition of CDA in subsection 89(1) of the Act. However, an amount would be included in the corporation's CDA under paragraph (c.1) of the definition of CDA at the end of the corporation's taxation year ended March 31, 2000. Such amount could be paid out as a "capital dividend" only in a taxation year subsequent to the taxation year of the disposition of the goodwill (i.e. on April 1, 2000 or after).
Reasons: Wording of the Act and current positions.
June 19, 2002
Vancouver Island HEADQUARTERS
Tax Services Office Corporate Reorganization
and Resources division
S. Prud'Homme
Attention: Rob McGregor (613) 957-8975
2002-0142112
Capital Dividend Account - Paragraphs (c) and (c.1) of the definition of "capital dividend account" in subsection 89(1) of the Income Tax Act
This is in reply to your memorandum dated May 22, 2002 in which you requested our views on the computation of a corporation's capital dividend account ("CDA") as that expression is defined in subsection 89(1) of the Income Tax Act (the "Act") in the situation described below.
1) Situation
In your memorandum, you described the following situation:
A corporation (the "Corporation") has a taxation year ending March 31.
The Corporation made the following acquisitions and dispositions of goodwill:
- In its taxation year ended March 31, 1995, acquisition of goodwill at a cost of $100,000;
- In its taxation year ended March 31, 1996, disposition of goodwill for proceeds of disposition of $200,000;
- In its taxation year ended March 31, 1997, acquisition of goodwill at a cost of $100,000;
- In its taxation year ended March 31, 2000, disposition of goodwill for proceeds of disposition of $200,000.
The Corporation pays a "capital dividend" to its shareholders on March 31, 2000. An election under subsection 83(2) of the Act is filed in respect of such dividend.
You requested our views on the computation of the Corporation's CDA in the situation described above at the end of its taxation year ended March 31, 2000.
For the purposes of our comments, we have assumed the following:
The Corporation was incorporated on April 1, 1994 and is a "private corporation" as those terms are defined in subsection 89(1) of the Act.
The only eligible capital expenditures and the only dispositions of eligible capital property made by the Corporation are those described above.
Since its incorporation, the Corporation claimed no deductions under paragraph 20(1)(b) of the Act in computing its business income.
The amount elected pursuant to subsection 83(2) of the Act with respect to the capital dividend was $33,333.
At the end of its taxation year ended March 31, 1996, an amount of $75,000 was included in computing the Corporation's income from its business for such year ((3/4 of proceeds of disposition of $200,000) minus (3/4 of eligible capital expenditures of $100,000)).
We are of the view that the CDA of the Corporation at the end of its taxation year ended March 31, 2000 would be computed as follows:
Paragraph (c) of the definition of CDA in subsection 89(1) of the Act: Nil.
= the total of all amounts each of which is an amount required to have been included
under this paragraph as it read for its application to a taxation year that ended before February 28, 2000
= (1/3 x 3/4 of the proceeds of disposition of goodwill for the 1996 taxation year) minus
(1/4 of the eligible capital expenditures made in the 1995 and 1997 taxation years)
= (1/3 x 3/4 x $200,000) - (1/4 x $200,000)
= $50,000 - $50,000
= Nil
Paragraph (c.1) of the definition of CDA in subsection 89(1) of the Act: $33,333.
= 1/2 of the amounts required by paragraph 14(1)(b) to be included in computing the Corporation's income in respect of its business for the taxation year ended March 31, 2000.
The amounts that were required by paragraph 14(1)(b) to be included in computing the Corporation's income in respect of its business for the taxation year ended March 31, 2000 would be determined as follows in the situation described above:
= 8/9 x the "excess"
= 8/9 x ( variable E in the definition of cumulative eligible capital ("CEC") in subsection 14(5) minus (variable A in the definition of CEC + variable B in the definition of CEC) (
= 8/9 x ( 3/4 of the proceeds of disposition of goodwill for the 1996 and 2000 taxation years) minus (3/4 of the eligible capital expenditures made in the 1995 and 1997 taxation years + the amounts previously included in the Corporation's income in the 1996 taxation year under paragraph 14(1)(b)) (
= 8/9 x ( (3/4 x $400,000) - ((3/4 x $200,000) + $75,000) (
= 8/9 x ( $300,000 - ($150,000 + $75,000) (
= 8/9 x $75,000
= $66,667
Consequently, the amount of CDA under paragraph (c.1) of the definition of CDA would be $33,333 (1/2 x $66,666).
It should be noted that variable E in the definition of CEC in subsection 14(5) would include 3/4 of all amounts that the Corporation was or may become entitled to receive as a result of a disposition of eligible capital property that occurred before the particular time (in this case, this particular time would be at the end of its taxation year ended March 31, 2000). Similarly, variable A in the definition of CEC in subsection 14(5) would include 3/4 of all eligible capital expenditures made or incurred by the Corporation in respect of its business before the particular time.
It should also be noted that, in order to establish the "excess" referred to in subsection 14(1) of the Act in the situation described above, variable B in the definition of CEC must be determined. This variable would represent amounts previously included in income under paragraph 14(1)(b) for taxation years of the Corporation that ended before the particular time (i.e. in the circumstances, the amount previously included in income under paragraph 14(1)(b) for the Corporation's 1996 taxation year).
Finally, it is our view that, under the "new rules," an amount of $33,333 would be included under paragraph (c.1) of the definition of CDA in subsection 89(1) of the Act only at the end of its taxation year ended March 31, 2000 in the situation described above. This is different from the "old rules" under which it was possible in certain situations for a corporation to include an amount under paragraph (c) of the definition of CDA in subsection 89(1) immediately after such corporation had disposed of any eligible capital property. Furthermore, it is our view that, in the situation describe above, the Corporation could not declare a "capital dividend" of $33,333 under subsection 83(2) of the Act until the beginning of the taxation year following the taxation year ended March 31, 2000 (i.e. on April 1, 2000 or after).
As you know, where a corporation elects under subsection 83(2) of the Act to have the whole amount of a dividend that is payable by it to be treated as a "capital dividend" and that dividend exceeds its CDA at that time, subsection 184(2) of the Act requires the corporation to pay a special tax equal to 3/4 of the amount of the excess, unless the corporation and all shareholders who receive a dividend agree to make a further election to treat the excess as a taxable dividend. On this point, it should be noted that the Technical Applications & Valuations Division of the Audit Directorate, Compliance Programs Branch, at the Canada Customs and Revenue Agency
Headquarters, is willing to review, on a case-by-case basis, files where a "capital dividend" has been paid by a corporation using the "old rules" in the course of a taxation year ended after February 27, 2000, in order to determine if an administrative relief may be provided in respect of the application of the Part III tax in a particular situation. In that respect, you may contact the Director of the Technical Applications & Valuations Division of the Audit Directorate, Mr. Claude Englehart at (613) 957-1555.
We trust that our comments will be of assistance. If you have any questions regarding the above, please do not hesitate to contact Stéphane Prud'Homme.
Maurice Bisson, CGA
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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