Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: (1) Whether the CRA would automatically extend the filing period for the election under ss 184(3), pursuant to ss 220(3.2), if the court rejects the corporation's appeal of the reassessment of its Part I tax (which caused the excessive ss 83(2) election) and of the assessment of its Part III tax? (2) Whether the CRA would defer processing the validly made election under ss 184(3), that was filed at the same time as the corporation filed notices of objections in respect of the reassessment of its Part I tax (which caused the excessive ss 83(2) election) and of the assessment of its Part III tax, until the court rejects the corporation's appeals? (3) In a situation where a corporation files a notice of objection in respect of the reassessment of its Part I tax (which caused an excessive ss 83(2) election) as well as a valid election under ss 184(3) and the CRA reassesses the Part I tax of the corporation's shareholder (to tax a deemed dividend pursuant to 184(3)(d)(ii)), (a) whether the CRA would accept to process the notice of objection filed by the corporation's shareholder in respect of the reassessment until the courts have finally accepted the corporation's appeal in respect of the reassessment of its Part I tax? (b) whether the CRA would accept a waiver from the corporation's shareholder and automatically reassess the Part I tax of the corporation's shareholder if the court decides in favour of the corporation?
Position: (1) No. (2) No.
Reasons: (1) It is not CRA's practice. (2) Technically, the CRA cannot defer the processing of the validly made election under ss 184(3) in light of the contradictory actions of the corporation. (3)(a) Technically, the CRA cannot defer the processing of the notice of objection filed by the corporation's shareholder in light of the contradictory actions of the corporation's shareholder and the corporation as well as the fact that there is no direct link between the reassessment of the corporation's Part I tax and the reassessment of the corporation's shareholder's Part I tax. (3)(b) The waiver should be considered inadmissible in light of the contradictory actions of the corporation's shareholder who had to approve the filing by the corporation of its election under 184(3).
December 5, 2007
Ms. Claire Dupont Corporate Reorganizations and Resource Industries Section
Technical Advisor
Montérégie-Rive-Sud Tax Services Office
3250, Lapinière Blvd. Marc LeBlond
Brossard QC J4Z 3T8 (613) 946-3261
2007-022121
Capital dividend
This is in response to your email of January 18, 2007 in which you asked for our comments on the above subject in relation to the situation described below. This is also in response to telephone conversations (M. LeBlond / C. Dupont as well as M. Bisson/C. Dupont), in which additional information and/or modifications relating to the present file were communicated to us. We apologize for the delay in responding to your request.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Particular Situation
- A corporation ("Aco"), a "private corporation" as defined in subsection 89(1), realized a gain on the disposition of a property in a particular taxation year. Aco treated this gain as a capital gain. Aco is not a "large corporation" as defined in subsection 225.1(8).
- Aco included an amount equal to the taxable capital gain in its "capital dividend account" ("CDA"), as defined in subsection 89(1). That amount was the only amount included in Aco's CDA.
- Aco paid a dividend to its shareholder, an individual, in an amount equal to the amount of its CDA immediately before the dividend became payable and made an election pursuant to subsection 83(2), in prescribed form and manner, in respect of the full amount of that dividend to deem it to be a capital dividend ("Capital Dividend")
- Following an audit, the Canada Revenue Agency (the "CRA") considered that the gain on the disposition of the disposed property constituted business income rather than a capital gain and reassessed Aco's income tax return for the particular taxation year in that regard. In addition, CRA adjusted Aco's CDA amount downward. Hence, the entire Capital Dividend gave rise to an excessive dividend election for the purposes of Part III tax under the Act. Consequently, Aco also became liable for tax under Part III of the Act, pursuant to subsection 184(2). We have assumed that Part I tax and Part III tax were assessed on the same date.
- Aco filed a Notice of Objection in respect of the reassessment of Part I tax under the Act and the assessment of Part III tax under the Act for the particular taxation year.
Your Questions
Aco could have made an election pursuant to subsection 184(3), in the prescribed manner and within the prescribed time, to avoid paying tax under Part III of the Act, but did not do so, preferring instead to object to any assessment of tax and avoid a reassessment of its sole shareholder’s return.
Aco would like the opportunity to extend or safeguard its right to file a subsection 184(3) election in the event that it is unsuccessful in its objection to the tax treatment of the gain on the property it disposed of, and proposed to you the options and asked the questions described below.
1. Following the Court's dismissal of Aco's appeal, Aco would apply for an extension of time pursuant to subsection 220(3.2) to file the subsection 184(3) election.
In this case, can the CRA undertake in advance to automatically accept this request for an extension of time?
2. Upon filing a Notice of Objection in respect of the reassessment of Part I tax under the Act and the assessment of Part III tax under the Act, Aco would also file an election under subsection 184(3) but would request that the CRA not deal with that election until the Court had ruled in favour of the CRA on the matter.
In this case, could the election be deferred by the CRA and still be considered valid?
In the event that Aco is successful in Court on its objection to the Part I tax assessment issued, Aco suggests the options and asks the questions outlined below.
3. Aco would only file a Notice of Objection in respect of the reassessment for Part I tax and an election pursuant to subsection 184(3) (thereby eliminating the Part III tax payable). The sole shareholder would then be taxed on a deemed taxable dividend received. Within the time limit for doing so, that shareholder would object to the Notice of Assessment received.
In this case:
(i) would the CRA agree to deal with this shareholder's Notice of Objection only after Aco's Notice of Objection had been finally resolved by the courts in favour of the corporation? and
(ii) if so, could the shareholder defer payment of the amount of tax payable in dispute and the related interest charges until the objection was resolved?
4. Aco would only file a Notice of Objection in respect of the assessment of Part I tax and an election under subsection 184(3) (thereby eliminating the tax payable under Part III of the Act). The sole shareholder would then be taxed on the deemed taxable dividend received. Instead of filing a Notice of Objection to the assessment of the deemed taxable dividend received, the shareholder would provide the CRA with a waiver of limitation form (T2029) to allow the CRA to cancel the taxation of the deemed dividend received once Aco has been successful in court.
In this case:
(i) would CRA would accept the waiver form and automatically reassess the shareholder to cancel the taxation of the dividend? and
(ii) if the shareholder had paid interest, would the interest be refunded?
5. Finally, you asked whether our answers to the previous questions would be different if a holding company (Holdco) holding all of the shares of Aco were interposed between the individual shareholder and Aco and a capital dividend was successively paid by Aco, included in Holdco's CDA, and paid by Holdco to the individual shareholder before the CRA audit was completed and the assessments issued.
Response to Question 1
In our view, it is not the CRA's policy to automatically accept a request for an extension of time pursuant to subsection 220(3.2) in a situation such as the one you have presented to us.
The procedures for making a formal request pursuant to subsection 220(3.2), which were in Information Circular IC-92-1, are now in Information Circular IC07 - 1 "Taxpayer Relief Provisions" (31 May 2007).
The responsibility for developing policies relating to the relief provisions of the Act (such as those under subsection 220(3.2)) rests with the Taxpayer Relief and Service Complaints Directorate (“TRSCD") in the Appeals Branch of the CRA.
We invite you to contact the Fairness and Support Section of the Appeals Branch at CRA Headquarters for more information on the administrative measures related to the application of subsection 220(3.2).
Response to Question 2
In our view, in the particular situation, technically, the CRA cannot suspend the processing of a valid election pursuant to subsection 184(3) ("184(3) Election") made by Aco until such time as the Court has ruled in favour of the CRA on Aco's appeal in respect of the reassessment of its Part I tax under the Act and the assessment of its Part III tax under the Act. Rather, it seems to us that the CRA's Assessment and Benefit Services Branch (the "ABSB") should give effect to Aco's valid 184(3) Election without delay and that the CRA's Appeals Branch ("AB") should vacate the assessment of Aco's Part III tax payable by virtue of subsection 165(3). Our conclusions are based on the following observations.
In the situation you have presented to us, the CRA receives Aco's 184(3) Election at the same time as the Notice of Objection regarding the assessment of Aco's Part III tax payable. This is unusual, to say the least, and involves conflicting steps. It seems to us that this procedure involves contradictory steps because by filing a Notice of Objection in respect of the assessment of its Part III tax under the Act, Aco indicates that it wishes to challenge the legal and/or factual basis for the assessment of that tax, whereas the filing of an 184(3) Election indicates that Aco, with the agreement of its shareholders, accepts the basis for the assessment of its Part III tax under the Act but wishes to have the assessment of its Part III tax under the Act reversed and instead to have a reassessment of the Part I tax under the Act payable by its shareholder for whom the 184(3) Election applies.
Generally, when an election form required by the Act is filed, the CRA immediately processes it by determining whether it was validly made so that the provisions of the Act apply in light of the election filed, as is the case, for example, for the subsection 85(1) election. ABSB also treats filed 184(3) Elections in this manner.
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In our view, the ABSB procedures referred to above indicate that a 184(3) Election should be considered by the AB when dealing with a Notice of Objection to an assessment of Part III tax under the Act.
The obligations of the AB, when it receives a Notice of Objection, are described in section 165(3) as follows:
On receipt of a Notice of Objection under this section, the Minister shall, with all due dispatch, reconsider the assessment and vacate, confirm or vary the assessment or reassess, and shall thereupon notify the taxpayer in writing of the Minister’s action.
We believe that in a situation such as the one you have presented to us, in order for the AB with all due dispatch to conduct a review of the assessment of Part III tax under the Act and make a decision to either vacate, confirm or vary it by virtue of subsection 165(3), the review of the assessment must take into account the 184(3) Election filed by the corporation, that is, not only to determine the validity of that 184(3) Election but also, if applicable, to give immediate effect to it by cancelling the assessment of Part III tax payable by the corporation and the assessment of Part I tax payable by its shareholders for whom the 184(3) Election applies.
Thus, in the particular situation, for the reasons set out above, we are of the view that, technically, the ABSB should not suspend the processing of Aco's valid 184(3) Election but rather should proceed with it and, as a result, the AB should cancel the assessment of the Part III tax payable by Aco pursuant to subsection 165(3) and the ABSB should assess the Part I tax payable by the Aco shareholder to whom the 184(3) Election applies.
Response to Question 3
In our view, in the situation presented, technically, it seems to us that the AB should not suspend the processing of the Aco shareholder's Notice of Objection until the Notice of Objection in respect of the Part I tax payable by Aco has been finally resolved by the courts in favour of Aco. Instead, the AB should ratify the reassessment of the tax under Part I of the Act payable by the shareholder of Aco, pursuant to subsection 165(3). Our conclusions are based on the following observations.
In the situation submitted, the manner in which Aco, and its shareholder to whom the 184(3) Election applies proceed, seems to us to be unusual, to say the least, and even contradictory. Indeed, where a shareholder participates in a 184(3) Election, the shareholder assents to the inclusion of a taxable dividend in the shareholder’s income. This assent is a sine qua non for the validity of the 184(3) Election made by the corporation, pursuant to paragraph 184(3)(a). The filing of a Notice of Objection by such shareholder to the inclusion of the dividend in the shareholder’s income following the making of the 184(3) Election is therefore the exact opposite of the assent the shareholder gave to the inclusion of this dividend in the shareholder’s income.
Furthermore, in the situation you have presented to us, technically, there is not even a direct link between the reassessment of the Part I tax payable by the Aco shareholder to whom the 184(3) Election applies, to which it objects, and the reassessment of the Part I tax payable by Aco, to which it objects. Indeed, technically, the reassessment of the Part I tax payable by Aco's shareholder is caused solely by the filing of a valid Election 184(3) by Aco, whereas the reassessment of the Part I tax payable by Aco is caused solely by the fact that the capital gain it reported was treated as business income of Aco.
Therefore, based on the foregoing observations, in a situation such as the one you have presented to us, it seems to us that the AB would have no choice but to reconsider the shareholder's assessment arising from the 184(3) Election with due dispatch and confirm it without delay. It follows, therefore, that in the situation presented, technically, the AB should not suspend or delay processing the Aco shareholder's Notice of Objection.
Response to Question 4(i)
In our view, in the situation presented, the CRA should consider the waiver of the "normal reassessment period" ("NRP"), as defined in subsection 152(3.1), filed by the Aco shareholder prior to the expiry of that period applicable to it for the year of reassessment, to be inadmissible.
Once again, in the situation presented, the manner in which Aco, and its shareholder to whom the 184(3) Election applies, proceed seems to us to be unusual, to say the least, and even contradictory. As stated above, where a shareholder participates in a 184(3) Election, the shareholder assents to the inclusion of a taxable dividend in income. This assent is a sine qua non to the validity of the 184(3) Election made by the corporation pursuant to paragraph 184(3)(a). The filing of a waiver of the NRP applicable to the shareholder for the year of the assessment of tax in respect of the dividend covered by the 184(3) election by the shareholder in order for the CRA to reassess the dividend for that year by virtue of subsection 152(4) to cancel the assessment of the dividend is therefore the exact opposite of the shareholder's assent to the inclusion of the dividend in income.
Therefore, in the particular situation, it seems to us that the CRA would have no choice but to consider the waiver filed by the shareholder of Aco ti be inadmissible.
Response to Question 4(ii)
Given our answer to the answer to question 4(i), question 4(ii) does not arise.
Response to Question 5
The principles set out in our answers to questions 1 to 4 would be substantially the same if a management company (Holdco) holding all of the shares of Aco were interposed between the individual shareholder and Aco and a capital dividend were successively paid by Aco, included in Holdco's CDA, and paid by Holdco to the individual shareholder before the CRA audit was completed and assessments issued.
We hope you find our comments of assistance and thank you for bringing these issues to our attention. Should you require any additional information regarding this matter, please do not hesitate to contact us.
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
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