25 June 1990 External T.I. 74785 F - Capital Dividends Elections

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.

SUBJECT: Capital Dividend Elections Subsection 83(2) of the Income Tax Act (the "Act")

This is in response to your memorandum of March 7, 1990 in which you requested our views regarding a dividend adjustment clause included in several directors resolutions with respect to capital dividend elections.

In the earlier mentioned memorandum you describe a situation where the directors resolution passed by the directors of a particular corporation provides that the corporation's shareholders are obligated to reimburse to the corporation any portion of a particular dividend payment under subsection 83(2) of the Act which is subsequently determined by the Department to be in excess of the capital dividend account (the "dividend adjustment clause").

Upon reviewing the above summarized situation you ask whether such a dividend adjustment clause would operate to adjust the amount of an excessive election downward thereby shielding the shareholders from Part III Tax, or alternatively whether the current practice of rejecting and returning the resolution on the basis that it does not conform with the provisions of the Act should be continued.

There is no provision in sections 83 and 184 for amending an already filed election, for filing an amended election, for later substituting another election for an already-filed election, for apportioning or adjusting the amount of an excessive election made thereunder or for revoking an election already made thereunder.

Accordingly, with respect to the dividend adjustment clause described earlier, it is our view that while such clauses may be binding as between the parties, they are not binding on the Department for fiscal purposes and, therefore, would not provide any relief from the provisions of section 184 with regards to this particular situation.

With regards to your second query, it is our view that the dividend adjustment clause may not, in and of itself nullify the resolution; however, it may nullify the subsection 83(2) dividend as the full amount of the dividend is not known and therefore the election is not in respect of the full amount as required.

As such, we suggest that the current practice of rejecting and returning the election along with a request for a subsection 83(2) election accompanied by a directors resolution free of any dividend adjustment clause be continued.

T. Harris for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch