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: Whether the CRA would defer processing a validly made election under subsection 184(3) until the Appeals Branch of the CRA confirms the Part III tax assessment, or until the court rejects the corporation's appeal?
Position: In document 2007-0221211I7, it was confirmed that, technically, the CRA could not defer the processing of a validly filed subsection 184(3) election until the ultimate resolution of an objection or determination by a court. The position has now been changed. The Assessment and Benefit Services Branch is now generally accepting to hold in abeyance a subsection 184(3) election filed in a timely manner until the resolution of the objection and subsequent appeal to court, if any, of the Part III tax assessment.
Reasons: Assessment and Benefit Services Branch position.
XXXXXXXXXX
2013-050495
M. Séguin
December 4, 2013
Dear XXXXXXXXXX,
Re: Subsection 83(2.1) - Part III Tax - subsection 184(3) Election
We are writing in response to your email received September 16, 2013 in which you requested our comments with respect to the interaction of subsection 83(2.1) of the Income Tax Act (the "Act"), Part III tax and the ability to make an election under subsection 184(3) in the context of a hypothetical scenario.
Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or a subparagraph is a reference to the relevant provision of the Act.
1) Facts and Assumptions
Our understanding of the facts and assumptions contemplated in your hypothetical situation is as follows:
1. A corporate taxpayer ("Aco") has a capital dividend account balance of $100. There is no dispute as to balance of the capital dividend account.
2. The sole shareholder of Aco is a corporation ("Bco"). The sole shareholder of Bco is an individual, Mr. X.
3. Aco has declared and paid a capital dividend to its sole shareholder, Bco, in the amount of $100. Aco filed the prescribed form as required under subsection 83(2).
4. Subsequent to this dividend, Bco has declared and paid a capital dividend to its sole shareholder, Mr. X, in the amount of $100. Bco filed the prescribed form as required under subsection 83(2).
5. Bco is not the original shareholder of Aco and did not own the Aco shares at the time that Aco realized the capital gain giving rise to the capital dividend account balance. Subsection 83(2.4) would therefore not apply to prevent the application of subsection 83(2.1).
6. The Canada Revenue Agency ("CRA") proposes to disallow the capital dividend paid by Aco under subsection 83(2.1). As a consequence, it is determined that Bco had no capital dividend account. The CRA further proposes to assess Part III tax against Bco on the basis that it declared a capital dividend in excess of its capital dividend account balance.
7. The CRA assesses Part III tax as proposed.
Bco wishes to dispute the assessment of Part III tax, but at the same time preserve the ability to file an election under subsection 184(3) to treat the dividend as a taxable dividend in the event that its objection is unsuccessful. You mention that the problem arises because the election under subsection 184(3) must be filed within 90 days of the date of the assessment, that is, within the same time period as the notice of objection must be filed. Even if the notice of objection is filed immediately, the probability that the CRA will consider and dispose of the objection within the 90-day period is slim. Additionally, even if the CRA ultimately confirms the assessment, Bco may wish to appeal that decision to the Tax Court of Canada.
2) Your Question
Your question relates to the possibility of the CRA accepting the following course of action:
(a) Bco would file a notice of objection on a timely manner with respect to the Part III tax assessment; and
(b) Bco would also make a subsection 184(3) election within 90 days of the date of the Part III tax assessment. However, Bco would request that the subsection 184(3) election be held in abeyance by the CRA pending the ultimate resolution of the objection (and subsequent appeal to court, if any).
In the event that the taxpayer's objection (or subsequent appeal) is ultimately allowed, the subsection 184(3) election would be withdrawn and treated as if it had never been made. In the event that the taxpayer's objection (or subsequent appeal) is ultimately dismissed, the subsection 184(3) election would be treated as valid and having been made in a timely manner.
3) Our comments
This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
In Technical Interpretation 2007-0221211I7, our Directorate made comments to a Tax Services Office of the CRA on a similar fact scenario. It was concluded that the CRA was technically unable to defer the processing of a validly filed subsection 184(3) election until the ultimate resolution of an objection to the Part III tax assessment or the final determination of the issue by a court.
This position has now been changed as we were informed that the Assessment and Benefit Services Branch of the CRA is now generally accepting to hold in abeyance a subsection 184(3) election filed on a timely manner until the resolution of the objection and subsequent appeal to court, if any, of the Part III tax assessment. In the event that the taxpayer's objection (or subsequent appeal) is ultimately allowed, the subsection 184(3) election would be withdrawn and treated as if it had never been made. In the event that the taxpayer's objection (or subsequent appeal) is ultimately dismissed, the subsection 184(3) election would be treated as valid and having been made in a timely manner.
If you have any further questions with respect to this issue, please contact Mr. Doug Schober of the T2 Processing and Assessing Programs, Corporation and Specialty Returns Division, Business Returns Directorate, Assessment and Benefit Services Branch of the CRA at (604) 951-7161.
We trust that the foregoing will be of assistance to you.
Yours truly,
Stéphane Prud'Homme, LL.B., M.Fisc.
For Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
c.c.: Mr. Doug Schober
T2 Processing and Assessing Programs
Corporation and Specialty Returns Division
Business Returns Directorate
Assessment and Benefit Services Branch
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