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Principal Issues: Impact of an amalgamation of corporations or the winding-up of a corporation on the calculation of the CDA.
Position: See below.
Reasons: See below.
9 OCTOBER 2015 FEDERAL TAX ROUNDTABLE
2015 APFF CONFERENCE
Question 6 Impact of an amalgamation or winding-up on the calculation of the capital dividend account ("CDA")
In a structure such as this:
Former Opco would pay a dividend of $1,000,000 from its CDA to Holdco. The dividend would be accounted for under paragraph (b) of the CDA definition in subsection 89(1) in the calculation of the Holdco CDA.
Holdco would pay a dividend of $1,000,000 from its CDA to the taxpayer. Holdco was not in the situation of paying an excess dividend out of its CDA, as the dividend received from Former Opco was accounted for under paragraph (b) of the CDA definition, whereas a capital loss previously realized by it on its portfolio of public company shares was accounted for under paragraph (a) thereof (i.e., the non-deductible portion of such capital losses was $1,000,000, and the balance under paragraph (a) was nil as only the excess of the non-taxable portion of capital gains over the non-deductible portion of capital losses is taken into account.)
Subsequently, the two corporations amalgamated (to form "Amalco").
Questions to the CRA
a) Following such amalgamation, was the dividend paid between the two corporations eliminated from paragraph (b) of the CDA definition with the gain initially generated from the sale of Former Opco’s tangible assets being accounted for in para (a) of the CDA calculation for Amalco?
If yes, can you confirm that this will result in Amalco having a negative CDA balance of $1,000,000?
b) Would your answer be the same if Former Opco instead were wound-up into Holdco?
When two taxable Canadian corporations amalgamate, paragraph 87(2)(z.1) provides the rules for establishing the CDA of the corporation resulting from the amalgamation.
In particular, paragraph 87(2)(z.1) stipulates inter alia that, in computing its CDA, the amalgamated corporation is deemed to be the same corporation as each predecessor corporation and to be its continuation. Thus, it follows from this paragraph that, in computing its CDA, the amalgamated corporation must take into account the various amounts which comprised the CDA of the predecessors. We assume that subsection 87(2.1) did not apply in this case.
Consequently, respecting your first question, the dividend paid between the two corporations would effectively be eliminated from paragraph (b) of the definition of CDA respecting Amalco and the gain initially arising from the sale of the assets of Former Opco would be included in paragraph (a) of the definition of CDA respecting Amalco. The balance of paragraph (a) of the definition of CDA respecting Amalco would be nil given that the non-taxable part of the capital gain realized by Former Opco of $1,000,000 would be reduced by the non-deductible part of the capital losses realized by Holdco ($1,000,000). The CDA of Amalco thus would have a “negative balance” of $1,000,000, taking into account the payment by Holdco of a dividend of $1,000,000 out of its CDA.
As to your second question respecting the winding-up of Former Opco into Holdco (to which the provisions of subsection 88(1) would apply), the calculation of the CDA of Holdco following the winding-up would be the same, taking into account paragraphs 87(2)(e.2) and 87(2)(z.1).
In finishing, it is to be noted that, if to begin with, Former Opco and Holdco amalgamated to form Amalco, the balance of paragraph (a) of the definition of CDA respecting Amalco would be nil given that the non-taxable portion of the capital gain of $1,000,000 realized by Former Opco would be reduced by the non-deductible portion of the capital losses sustained by Holdco ($1,000,000). The CDA of Amalco thus would be nil at that moment. In such circumstances, it thus would be impossible for to pay a capital dividend to the shareholder of Amalco. Since the wording of this question describes only briefly a given hypothetical situation and in the absence of an analysis of all the facts and circumstances respecting a particular given situation, it is impossible for us to comment more precisely on the application of subsection 245(2) in this context.
October 9, 2015
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