7 January 2009 External T.I. 2008-0303091E5 - Excessive Capital Dividend and 87(2)(z.2)

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.

Principal Issues: Could a parent corporation, whose subsidiary would pay an excessive capital dividend and subsequently be wound-up and dissolved, be deemed to be a continuation of the subsidiary such that the parent could make an excessive capital dividend election pursuant to subsection 184(3) and 184(4) of the Income Tax Act ("ITA")?

Position: Yes. Paragraph 88(1)(e.2) provides that paragraph 87(2)(z.2) applies to the winding-up to which subsection 88(1) applies. Paragraph 87(2)(z.2) provides that for the purposes of Parts III and III.1, the parent is deemed to be the same corporation as, and a continuation of, the subsidiary. Consequently, the parent generally would be permitted to make an excessive capital dividend election pursuant to subsections 184(3) and 184(4) in the foregoing circumstance.

Reasons: Wording of the ITA.

XXXXXXXXXX 							2008-030309
S. Snell
(613) 957-2095
January 7, 2009

Dear Sir:

Re: Tax Implications of Excessive Capital Dividend Where Issuing Subsidiary Subsequently Wound-Up Into Parent

We are writing in response to your letter dated November 21, 2008 in which you request our comments regarding the application of subsections 184(3) and (4) of the Income Tax Act ("ITA") in the circumstance where a subsidiary paying an excessive capital dividend is subsequently wound-up into the parent and dissolved, prior to having made a subsection 184(3) election.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the ITA.

1) Facts and Assumptions

Our understanding of the facts is as follows:

• Prior to its winding-up under subsection 88(1), SUBCO (the "subsidiary" for the purposes of subsection 88(1)) would pay PARENT (the "parent" for the purposes of 88(1) and the sole "dividend recipient") a capital dividend.
• The dividend would be determined to be in excess of SUBCO's capital dividend account ("CDA"), subsequent to SUBCO's winding-up and dissolution.

2) Your Views

You state that, in accordance with Technical Interpretation 2007-0220471E5 (F), it is your view that the penalty tax on excessive dividends under subsection 184(2) would apply in the circumstance outlined above as SUBCO would cease to exist and, consequently, SUBCO could not make the election to treat the excess capital dividend as a separate taxable dividend pursuant to subsection 184(3). Further, you indicate that the foregoing would be the case in spite of any agreement by Parent pursuant to subsection 184(4) to treat the excess portion of the capital dividend as a separate taxable dividend.

Furthermore, you suggest that SUBCO would be unable to have the election revoked by the Minister pursuant to subsection 220(3.2), as SUBCO would not be in existence at the time of the determination of the excessive capital dividend. Similarly, Parent would not be permitted to request a revocation of the capital dividend election, as the Parent is not the "taxpayer" as denoted by subsection 220(3.2).

You have requested that we provide our comments regarding the aforementioned analysis.

3) Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. The particular situation outlined in your letter appears to be a factual one, involving specific taxpayers and completed transactions. Accordingly, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we offer the following general comments.

Paragraph 88(1)(e.2) provides, among other things, that paragraph 87(2)(z.2) applies to the winding-up to which subsection 88(1) applies.

Paragraph 87(2)(z.2) provides that for the purposes of Parts III and III.1, the parent is deemed to be the same corporation as, and a continuation of, the subsidiary. The Technical Notes relating to paragraphs 87(2)(z.2) and 88(1)(e.2) state that under paragraph 87(2)(z.2), the new corporation (or the parent) will be entitled to elect, for the purposes of determining the amount of Part III tax payable, to treat as a separate dividend under subsection 184(3) an amount that is an excessive dividend in respect of the predecessor's (or the subsidiary's) CDA. Consequently, it is our opinion that PARENT generally would be permitted to make an excessive capital dividend election pursuant to subsections 184(3) and (4) in the foregoing circumstance.

The above comments represent our general view with respect to the subject matter and are not binding on the CRA, as explained in paragraph 22 of Information Circular 70-6R5.

We trust that the foregoing will be of assistance to you.

Yours truly,

Stéphane Prud'Homme, LL.B, M. Fisc.

Manager
Mergers and Acquisitions Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch