Translation disclaimer
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: Whether the definition of capital dividend account in 89(1) contains an adjustment similar to the adjustment in 111(1.1) for net capital loss?
Position: No
Reasons: The definition of capital dividend account does not contain such adjustment.
XXXXXXXXXX 2003-000138
R. Gagnon
March 14, 2003
Dear Sir,
Subject: Capital dividend account
This is in response to your letter of February 5, 2003 in which you requested our opinion regarding the calculation of Amalco's "capital dividend account" ("CDA") as defined in subsection 89(1) of the Income Tax Act in the situation described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Facts
1. Amalco, HoldcoA, HoldcoB and Subco1 were "taxable Canadian corporations" as defined in subsection 89(1) and "Canadian-controlled private corporations" as defined in subsection 125(7). Parentco and Subco2 were "taxable Canadian corporations" as defined in subsection 89(1) and "Canadian-controlled private corporations" as defined in subsection 125(7).
2. The regular taxation year-end of HoldcoA, HoldcoB, Parentco, Subco1 and Subco2 is or was January 31.
3. Mr. A held all of the issued and outstanding shares of the capital stock of HoldcoA. Ms. B held all of the issued and outstanding shares of the capital stock of HoldcoB.
4. Mr. A and Ms. B were not related persons within the meaning of subsection 251(2).
5. The issued and outstanding shares of the capital stock of Parentco consisted solely of common shares of one class. HoldcoA and HoldcoB each held 50% of the issued and outstanding common shares of the capital stock of Parentco prior to the amalgamation of Parentco and Subco2 described in paragraph 9 below. HoldcoA and HoldcoB each held 50% of the issued and outstanding common shares of the capital stock of Amalco after the amalgamation and prior to the share transfer described in paragraph 10 below.
6. Parentco held, prior to the transactions described in paragraphs 7 and 9 below, all of the issued and outstanding shares of capital stock of Subco1 and Subco2.
7. On January 14, 2000, Parentco disposed of all of its shares in the capital stock of Subco1. Parentco then realized in its taxation year ending January 31, 2000 a "capital loss" within the meaning of paragraph 39(1)(b) amounting to $1,690,000, which also constituted a "business investment loss" ("BIL") within the meaning of paragraph 39(1)(c).
8. Immediately prior to the amalgamation described in paragraph 9 below, Subco2 had an unused "non-capital loss" (as defined in subsection 111(5)) of $650,000.
9. Parentco and Subco2 amalgamated on April 17, 2000. The amalgamation of Parentco and Subco2 constituted an amalgamation within the meaning of subsection 87(1). The amalgamated company is Amalco. The certificate of amalgamation provided that the date of amalgamation was April 17, 2000, but did not specify a particular time on that day on the certificate of amalgamation.
10. At a particular time during the day on April 18, 2000, HoldcoB sold to HoldcoA all of its shares of Amalco. There was thus an acquisition of effective (de jure) control of Amalco by HoldcoA for the purposes of the Act. Amalco owned land and a building immediately prior to the acquisition of control of Amalco. The fair market value of the land and building immediately prior to the acquisition of control were $1,617,000 and $1,984,000, respectively. The adjusted cost base (as defined in section 54) of Amalco's land and building was $726,000 and $380,000 respectively. The "undepreciated capital cost" (as defined in subsection 13(21)) of the building was $84,000. The land and building were owned by Subco2 prior to the amalgamation of Parentco and Subco2.
11. Amalco made an election pursuant to paragraph 111(4)(e) in respect of its land and building in its return of income for its taxation year ending April 17, 2000. The amounts designated by Amalco for the purposes of paragraph 111(4)(e) in respect of the land and the building were $1,617,000 and $1,984,000, respectively, i.e., their FMV.
12. Amalco did not make an election pursuant to 256(9) in respect of HoldcoA's acquisition of control of Amalco.
13. The transactions described in paragraphs 7 to 10 above were the only transactions that had an impact on the calculation of Amalco's CDA.
Our Comments
It appears to us that the situation described in your letter could constitute 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 the responsibility of the relevant Tax Services Office to determine whether completed transactions have received appropriate tax treatment. We can, however, offer the following general comments which may not apply in their entirety to the situation at hand.
The CCRA's position regarding the effective date of an amalgamation is set out in paragraph 9 of Interpretation Bulletin IT-474R. The effective date of amalgamation is governed by corporate law and is generally the date of issuance of letters patent or the date shown or set forth in the certificate of amalgamation, as the case may be. The time of the amalgamation is the earliest moment on that date in the absence of a particular time specified in the certificate of amalgamation. In the situation described above, it appears to us that the amalgamation of Parentco and Subco took place at the earliest time on April 17, 2000.
Paragraph 87(2)(a) provides inter alia that the entity resulting from an amalgamation (within the meaning of subsection 87(1)) is deemed to be a new corporation whose first taxation year begins at the time of the amalgamation, and that the taxation year of each predecessor corporation is deemed to end immediately before the amalgamation. In the above situation, Amalco's first taxation year would therefore have begun on the first instant of April 17, 2000.
Subsection 249(4) provides that where control of a corporation is acquired at any time by a person then, subject to paragraph 249(4)(b), the taxation year of the corporation is deemed to end immediately before the time of the acquisition of control, and a new taxation year of the corporation is deemed to begin at the time of the acquisition of control. Subsection 256(9) provides that, for the purposes of the Act, control of a corporation that is acquired at a particular time is deemed to be acquired at the beginning of the day on or after which that time occurs or, if the corporation so elects, at the time of that day on which control is actually acquired. In the situation described above, control of Amalco would be deemed to be acquired at the beginning of April 18, 2000 pursuant to subsection 256(9). In addition, Amalco's taxation year that would have commenced on April 17, 2000 would end at midnight on April 17, 2000, and Amalco would have a new taxation year commencing at the beginning of April 18, 2000.
The rules governing the computation of the CDA are included in the definition of CDA in subsection 89(1), and include several components. Capital gains and losses are taken into account in paragraph (a) of the definition of CDA. In summary, paragraph (a) of that definition provides that the excess of the non-taxable portion of capital gains realized by a taxpayer over the non-deductible portion of capital losses realized by the taxpayer is added in computing the taxpayer's CDA.
Despite the recent amendments to section 38 regarding the inclusion rate for a capital gain and the deduction rate for a capital loss, there has been no consequential change regarding the manner in which the CDA is computed in paragraph (a) of the definition of CDA in subsection 89(1). For the purposes of the calculation in paragraph (a) of the definition of CDA in subsection 89(1), taxable capital gains and allowable capital losses determined in accordance with the rules (i.e. applicable rates) in section 38 must be taken into account. The adjustments provided for in subsection 111(1.1) for the purposes of paragraph 111(1)(b) are not taken into account for the purposes of computing the CDA.
In the situation described above, the $1,690,000 capital loss realized by Parentco in its taxation year ending January 31, 2000 would give rise to an allowable capital loss of $1,267,500 (75% X $1,690,000). It should be noted that a capital loss may also constitute an ABL. For the purposes of calculating the CDA of a corporation resulting from an amalgamation within the meaning of subsection 87(1), paragraph 87(2)(z.1) provides inter alia that the new corporation is deemed to be the same corporation as, and a continuation of, each predecessor corporation. Consequently, for the purposes of calculating Amalco's CDA in the situation described above, Parentco's capital loss ($1,690,000) and allowable capital loss ($1,267,500) should be taken into account.
In the situation described above, Amalco would realize a capital gain of $891,000 in respect of its land and a capital gain of $1,604,000 in respect of its building, as a result of the election Amalco made under paragraph 111(4)(e). For the purposes of computing Amalco's CDA, those capital gains would be deemed by paragraph 111(4)(f) to have been realized by Amalco on the disposition of property immediately before the deemed disposition time determined under paragraph 111(4)(e). For that Amalco taxation year, the taxable capital gains would therefore be 2/3 of the capital gains.
In the situation described above, Amalco's CDA, calculated after Amalco has made the election provided for in paragraph 111(4)(e), would correspond to the excess of the non-taxable portion of Amalco's capital gains (1/3 of $2,495,000 = $831,667) over the non-deductible portion of Amalco's capital losses (25% of $1,690,000 = $422,500), i.e. $409,167.
Please note that this opinion is not an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is not binding on the Canada Customs and Revenue Agency with respect to any particular factual situation.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and
and Resource Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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