26 June 1998 External T.I. 9729995 - 89(1), CAPITAL DIVIDEND ACCOUNT

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether the negative resultant amount which is produced under the subtraction equation in paragraph (a) in the definition of "capital dividend account" in subsection 89(1) of the Act when the non-deductible portion of the capital losses are greater than the non-taxable portion of the capital gains, should have an impact on the computation of a corporation's capital dividend account.

Position:

The negative resultant amount which is produced under paragraph (a) in the definition of “capital dividend account”, should have no impact on the computation of the corporation's capital dividend account.

Reasons:

The use of the word "exceeds" in the subtraction equation of paragraph (a) in the definition of "capital dividend account" will restrict the resultant amount to be a positive number.

XXXXXXXXXX 		              	                                                 5-972999
	                                                                Daniel Wong
Attention:XXXXXXXXXX                                               	(613) 954-4949

June 26, 1998

Dear Sir:

Re: Capital Dividend Account

This is in reply to your letter of November 6, 1997, wherein you requested our opinion with respect to the definition of “capital dividend account” in subsection 89(1) of the Income Tax Act (the “Act”). More specifically, you asked us to confirm whether, in the situation described below, your numerical analysis and interpretation as stated in your letter is correct.

Company A, which is a CCPC, has a December 31 year-end. In its 1996 taxation year, Company A disposed of certain capital assets and realized a capital gain. The non-taxable portion of the capital gain of $150,000 was added to its capital dividend account. Prior to the addition of the $150,000, Company A’s capital dividend account balance was zero. In January of 1997, Company A declared and paid a dividend of $140,000. Immediately before the declaration and payment of the dividend, Company A’s capital dividend account had a balance of $150,000. Company A elected under subsection 83(2) to deem the full amount of $140,000 to be a capital dividend. In March of 1997, Company A sold certain capital assets and incurred a capital loss. The non-deductible portion of the capital loss was $200,000. In the same month, Company A disposed of eligible capital property and realized a gain. The non-taxable portion of the gain was $300,000.

Based on the situation as described above, you have determined that as of December 31, 1997, Company A had a balance of $160,000 in its capital dividend account. In your numerical computation, firstly, you have applied the non-deductible portion of the capital loss of $200,000 against the non-taxable portion of the capital gain of $150,000, and you have interpreted that the negative amount of $50,000 which resulted from such subtraction is deemed by paragraph (a) in the definition of “capital dividend account” in subsection 89(1) of the Act to be zero, and you have concluded that this negative amount has no implication under that paragraph; Secondly, you have included the non-taxable portion of the gain of $300,000 in Company A’s capital dividend account; and thirdly, you have subtracted from the non-taxable portion of the gain of $300,000 the capital dividend of $140,000 paid by Company A in 1997.

COMMENTS

In your letter, you outlined what appears to be an actual fact situation related to transactions and events which have taken place. The review of such situations is generally the responsibility of the local taxation services offices and, as outlined in paragraph 22 of Information Circular 70-6R3, it is not our practice to provide specific opinions on factual situations otherwise than in the context of an advance income tax ruling. In any event, a request cannot be considered for a ruling when the transactions are completed or where the issues involved are primarily questions of fact.

Nevertheless, we are prepared to provide the following comments which we hope will be of assistance to you.

Paragraph (a) in the definition of “capital dividend account” provides a subtraction equation whereby, in general terms, the cumulative non-deductible portion of capital losses is to be deducted from the cumulative non-taxable portion of capital gains. In our view, the amount that results from the application of the subtraction equation in paragraph (a) in the definition of “capital dividend account” cannot be less than zero, because paragraph (a) states that:

“ the amount, if any, by which (i)......exceeds (ii).....”

The use of the word ”exceeds” in paragraph (a) will restrict the resultant amount to be a positive number. To the extent that the non-deductible portion of the capital losses exceed the non-taxable portion of the capital gains, the amount determined under paragraph (a) for the purpose of computing the capital dividend account at that particular time, will be nil and the excess will not reduce the aggregate of the amounts determined under paragraphs (b), (c), (d) and (e) in computing the corporation’s capital dividend account.

The above comments represent our general views with respect to the subject matter of your letter and are provided in accordance with paragraph 22 of Information Circular 70-6R3.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch