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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: Computation of a corporation's capital dividend account in some given fact situations.
Position: General comments
Reasons: Wording of the Act.
2002-017340
XXXXXXXXXX Guy Goulet CA, M.Fisc
(613) 957-9768
January 6, 2003
Dear Sir,
Subject: CDA calculation
This is in response to your letter of November 11, 2002, in which you asked us about the calculation of the capital dividend account ("CDA").
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Your Questions
First, you wish to know how to calculate the CDA additions for the year 2000, since there are 3 different capital gains inclusion rates for that year. You are asking whether you should use an average rate for the fiscal period or whether you should use the rate applicable to the period of realization.
Second, you asked us to indicate the impact on the CDA calculation of a capital loss incurred in a taxation year beginning after 2000, in the situation where this loss would be applied to a prior year where the inclusion rate is 75%.
Thirdly, you have asked us if you can take into account taxable capital gains allocated by a trust on a supplementary Form T-3 when calculating a corporation's CDA.
Finally, you have submitted the following Particular Situation and are asking us to confirm the CDA balance on December 31, 2001:
CDC balance on December 31, 1998: NIL
| Fiscal period |
Results |
$ |
| December 31, 1999 |
Capital gain |
$3,000 |
| December 31, 2000 |
Period 1: Capital gain |
$10, 000 |
| |
Period 2: Capital loss |
($3,000) |
| |
Period 3: Capital gain |
$1,000 |
| December 31, 2001 |
Capital loss |
$4,000 |
It appears to us that the situation described in your letter could be an actual situation involving taxpayers. The Canada Customs and Revenue Agency ("CCRA") does not generally provide written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, it is up to the relevant Tax Services Office to determine whether completed transactions have received the appropriate tax treatment. We can, however, offer the following general comments, which may not fully apply to a particular situation.
CDA calculation
The rules governing the calculation of the CDA are set out in subsection 89(1) and include several components. Paragraph (a) of the definition of CDA in subsection 89(1) deals with the capital gain/loss component. In summary, this component represents, for a given period, the excess of the non-taxable portion of capital gains over the non-deductible portion of capital losses incurred by the corporation.
The amendments to section 38 concerning the capital gain inclusion rate or the capital loss deduction rate have not changed the way in which the capital gain/capital loss component of the CDA is calculated. The non-taxable portion of capital gains and the non-deductible portion of capital losses (specifically, the excess of capital gains over taxable capital gains and the excess of capital losses over allowable capital losses) must still be calculated.
Under the transitional rules in section 38, the rate of inclusion or deduction of a capital gain or loss to be used depends on the period of disposition of the capital property. The year 2000 consists of three periods:
Period 1: Before February 28, 2000;
Period 2: After February 27, 2000 and before October 18, 2000;
Period 3: After October 17, 2000.
Where there are dispositions of capital property in a single period, the inclusion or deduction rate is 75% for Period 1, 66 2/3% for Period 2 and 50% for Period 3. However, if there are dispositions of capital property in more than one period, the inclusion or deduction rate must be determined according to the transitional rules in section 38. Please refer to pages 11 to 13 of Guide T4037 Capital Gains 2000 for a summary of those transitional rules (see our website at http://www.ccra-adrc.gc.ca/formspubs/prioryear/t4037/t4037-00f.pdf).
Capital loss incurred after 2000 and applied retrospectively to 1999
Under subparagraph (a)(ii) of the definition of CDA in subsection 89(1), the non-deductible portion of capital losses is included in calculating the CDA balance at the time of disposition of the property on which the loss was incurred. Thus, a taxpayer with a capital loss in a taxation year beginning after 2000 must take into account an allowable capital loss calculated at the 50% rate for the purpose of calculating the CDA, even if the loss is carried back to a year in which the capital gain inclusion rate is different.
Capital gains allocated by a trust
Taxable capital gains allocated by a trust may be taken into account in calculating a corporation's CDA under paragraph (f) of the definition of CDA in subsection 89(1). This paragraph was added to the Act in 2001 and applies to elections in respect of capital dividends that became payable after 1997.
Particular Situation: CDA balance at December 31, 2001
To determine the CDA balance in the Particular Situation, we need to calculate the non-taxable portion of capital gains and the non-deductible portion of capital losses. To do this, reference must be made to the transitional rules in section 38 to determine the inclusion rate for the taxation year ending December 31, 2000.
Subparagraph (e)(viii) of the transitional rules relating to the determination of "taxable capital gain" or "allowable capital loss" from the disposition of a property in paragraphs 38(a) and 38(b) indicates that the inclusion rate is the fraction obtained by the following formula when net capital gains for Period 1 exceed net capital losses for Period 2 and there are net capital gains for Period 3 (which is the case in the Particular Situation):
[(3/4 X A) + (1/2 X B)] / (A+B)
where:
A represents the excess of Period 1 net capital gains over Period 2 net capital losses;
B represents net capital gains for Period 3.
The inclusion rate for the taxation year ending December 31, 2000 would therefore be 72% ([(3/4 X (10,000 - 3000)) + (1/2 X 1000))] / 8000). The CDA balance at December 31, 2001 in the Particular Situation would be $990 and would be calculated as follows:
|
Taxation Year
|
Tax rate
Section 38
|
Non-taxable
portion of
capital gains
89(1)(a)(i)
|
Non-deductible
portion of
capital losses
89(1)(a)(ii)
|
Excess
89(1)a)(i)
|
|
1999
|
75 %
|
$750
|
|
|
|
2000
|
72 %
|
$3,080
|
$840
|
|
|
2001
|
50 %
|
|
$2,000
|
|
| |
|
$3,830
|
$2,840
|
$990
|
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and
Resource Industry Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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