14 November 2003 External T.I. 2003-0037505 - 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 CCRA.

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

Principal Issues: Timing of the inclusion of the non-taxable portion of a capital gain realized by a partnership in a corporate partner's capital dividend account where the particular corporate partner is a private corporation.

Position: A private corporation that is a partner would include its share of any partnership capital gain and taxable capital gain in clause 89(1)(a)(i)(A) and clause 89(1)(a)(i)(B), respectively, in its taxation year that that includes the end of the partnership's fiscal period.

Reasons: The law.

XXXXXXXXXX Michael Cooke
2003-003750
November 14, 2003

Dear XXXXXXXXXX:

Re: Capital Dividend Account

This is in reply to your facsimile letter dated August 28, 2003, wherein you requested our views on the computation of a private corporation's "capital dividend account" ("CDA") within the meaning of that term in subsection 89(1) of the Income Tax Act (the "Act") in the following fact situation.

In your letter you indicate that a private corporation ("corporate partner"), that has a taxation year ending on June 30, is a member of a partnership that has a fiscal period ending on December 31. During the partnership's fiscal period ending December 31, 2002 the partnership disposed of a capital property and realized a capital gain which it allocated to the partners on a T5013 (Box 23). The corporate partner included its allocated portion of the taxable capital gain in its income for its taxation year ending June 30, 2003. We have assumed that corporate partner would have no other additions to, or subtractions from, its CDA.

Your question is whether the non-taxable portion of the capital gain that was realized by the partnership and allocated to the corporate partner would be included in the particular corporate partner's CDA on December 31, 2002 such that it could be paid out as a capital dividend on January 1, 2003, or on June 30, 2003.

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 706R5 ("IC-70-6R5") dated May 17, 2002. 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.

Based on subparagraph 96(1)(c)(i) and paragraph 96(1)(f) of the Act, it is our view that a partner's share of a capital gain and taxable capital gain realized by a partnership would only be attributable to the partner for tax purposes at the end of the partnership's fiscal period in which the capital gain was realized. Accordingly, where a private corporation is a member of such partnership, for the purpose of computing its CDA, the particular private corporation would include its share of any such capital gain and taxable capital gain in clause 89(1)(a)(i)(A) and clause 89(1)(a)(i)(B), respectively, in its income for its taxation year that includes the end of the partnership's fiscal period.

More specifically, in the situation described above, the corporate partner's share of the capital gain and taxable capital gain that was realized by the partnership in the partnership's fiscal period ending December 31, 2002, would be included in the particular corporate partner's computation of its CDA such that it would be available to be paid to its shareholders as a capital dividend on January 1, 2003.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R5.

Yours truly,

David Palamar
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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