22 January 1997 Internal T.I. 9700236 - INVESTMENT CORPORATION - CAPITAL GAINS REFUND

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:

If a corporation that was throughout a particular taxation year an investment corporation declares and pays out dividends during the first 60 days of the following taxation year, must the corporation also be an investment corporation throughout that following taxation year in order to qualify for the capital gains refund under subsection 131(2).

Position:

Yes.

Reasons:

For an investment corporation to qualify to make the election under subsection 131(1) to treat dividends as capital gains dividends, the dividends must be payable in a taxation year throughout which the corporation was an investment corporation. Accordingly, even though the corporation is an investment corporation throughout the year with respect to which a capital gains refund is being sought, dividends paid during the first 60 days of the corporation's following taxation year would qualify as capital gains dividends only if the corporation was an investment corporation throughout that subsequent taxation year.

			January 22, 1997

	HEADQUARTERS                  	HEADQUARTERS
	Business Returns Processing Division	J. Leigh
	T2 Programs	952-1505

	Attention:  Brian Way
		7-970023

XXXXXXXXXX - Capital Gains Refund

This is in reply to your memorandum dated December 24, 1996 in which you requested our views on whether XXXXXXXXXX would have been entitled to a capital gains refund in respect of its March 31, 1995 taxation year if it had paid a capital gains dividend during the period from April 1, 1995 to May 30, 1995.

We understand that XXXXXXXXXX was an investment corporation other than a mutual fund corporation throughout its March 31, 1995 taxation year. We further understand that XXXXXXXXXX did not pay any capital gains dividend in the period from May 31, 1994 to March 31, 1995. It was planning on declaring and paying a capital gains dividend in the 60 day period from April 1, 1995 to May 30, 1995. However, since XXXXXXXXXX determined that it would lose its status as an investment corporation on April 27, 1995 based on the proposed changes to the definition of "investment corporation" in paragraph 130(3)(a) of the Income Tax Act (the "Act") announced on April 26, 1995, it did not declare or pay any capital gains dividend in the period from April 1, 1995 to May 30, 1995. XXXXXXXXXX position is that had it known of the June 20, 1996 proposals in May 1995 it would have paid the capital gains dividend and obtained a capital gains refund in respect of its March 31, 1995 taxation year.

Subsection 130(2) of the Act allows an investment corporation to obtain a refund of its capital gains tax. Specifically, it provides that where a corporation that was throughout a taxation year an investment corporation (other than a mutual fund corporation), the rules applicable to a mutual fund corporation in subsections 131(1) to (3.2) of the Act apply in respect of the corporation for the year as if it had been a mutual fund corporation throughout that and all previous taxation years ending after 1971 throughout which it was an investment corporation.

Subsection 131(2) of the Act provides a mechanism for determining a mutual fund corporation's capital gains refund for a particular taxation year. Such a determination is based, in part, on a percentage of the total of all capital gains dividends paid by the corporation in the period commencing 60 days after the commencement of the year and ending 60 days after the end of the year. Under subsection 131(1) of the Act, where a dividend became payable by a corporation that was throughout the taxation year in which the dividend became payable a mutual fund corporation, the corporation can elect to deem the dividend to be a capital gains dividend payable out of the corporation's capital gains dividend account, as defined in subsection 131(6) of the Act.

In XXXXXXXXXX case, since it was an investment corporation throughout its March 31, 1995 taxation year, the capital gains dividend rules in subsections 131(1) to 131(3.2) of the Act apply to XXXXXXXXXX as if it had been a mutual fund corporation throughout its March 31, 1995 taxation year by virtue of paragraph 130(2)(a) of the Act. However, as noted above, for a dividend to be deemed a capital gains dividend, the election under subsection 131(1) of the Act must be made by a corporation that was a mutual fund corporation throughout the taxation year in which the dividend became payable. Accordingly, XXXXXXXXXX would need to have been an investment corporation throughout its March 31, 1996 taxation year in order to elect to have subsection 131(1) of the Act apply to any dividend that became payable during the period from April 1, 1995 to May 30, 1995.

In summary, we agree with the interpretation given by XXXXXXXXXX would have to be an investment corporation throughout its March 31, 1996 taxation year in order for the corporation to qualify to pay a capital gains dividend and thereby receive a capital gains refund in respect of its March 31, 1995 taxation year.

We trust that our comments will be of assistance.

Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch