28 January 1999 External T.I. 9818515 - 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 definition of "capital dividend account" in subsection 89(1) contains an upward adjustment to its allowable capital loss component which is similar to the adjustment made to a corporation's net capital loss in subparagraph 111(1.1)(a)(ii) of the Act.

Position: No.

Reasons:

The existing wording in the definition of "capital dividend account" does not contain such upward adjustment to its allowable capital loss component.

						5-981851
XXXXXXXXXX 					Daniel Wong
(613) 954-4949
Attention: XXXXXXXXXX 

January 28, 1999

Dear Sirs:

Re: Subsection 89(1) - Capital Dividend Account

This is in reply to your letter of July 10, 1998, 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 indicated that the definition of the “capital dividend account” of a corporation in subsection 89(1) consists of several components, one of which is the amount by which any capital gains realized in the period net of the taxable portion thereof exceeds the amount of any capital loss incurred by the corporation in the period net of the allowable capital loss in respect thereof. You believe that in the case of a pre-1988 disposition of capital property, the allowable capital loss in respect of such disposition should be adjusted (similar to the adjustment provided in subparagraph 111(1.1)(a)(ii) of the Act) for the purpose of determining the corporation’s capital dividend account at any particular time after 1987 so as to reflect the inclusion rate changes in subsection 38(1). You provided the following example to demonstrate this perceived anomaly:

A Co. disposed of a capital property in 1980 and incurred a capital loss of $100,000 and an allowable capital loss of $50,000. As the allowable capital loss of $50,000 was not utilized by A Co. against its income for the 1980 taxation year, it then became part of A Co.’s net capital loss and was carried forward. In 1998, A Co. disposed of a capital property and realized a capital gain of $200,000 and a taxable capital gain of $150,000. The net capital loss realized in 1980 was then applied in computing A Co.’s taxable income for its 1998 taxation year.

In this scenario, the allowable capital loss of $50,000 which was part of A Co.’s net capital loss, was adjusted upward to $75,000 by virtue of subparagraph 111(1.1)(a)(ii) of the Act. This upward adjustment was a result of the inclusion rate changes in respect of the capital gain and capital loss in subsection 38(1). However, subparagraph (a)(ii) of the definition of capital dividend account does not seem to provide for a similar adjustment to its allowable capital loss component. As a result, even though the allowable capital loss of $50,000 which became part of A Co.’s net capital loss, was increased by $25,000 by virtue of subparagraph 111(1.1)(a)(ii) and was applied by A Co. against its taxable capital gain of $150,000 in 1998, the same allowable capital loss of $50,000 which was included in computing A Co.’s capital dividend account is not adjusted. In your view, had the definition of capital dividend account provided for such an upward adjustment, A Co. would have had $25,000 more in its capital dividend account.

COMMENTS

We agree with your interpretation that the definition of “capital dividend account” in subsection 89(1) does not contain an upward adjustment to its allowable capital loss component which is similar to the adjustment made to a corporation’s net capital loss in subparagraph 111(1.1)(a)(ii) of the Act. Since you believe that this is an inappropriate result, we will forward a copy of your letter to the Department of Finance for their consideration.

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
- 1 -