Subsection 184(2) - Tax on excessive elections
Administrative Policy
22 January 2019 External T.I. 2019-0791631E5 - Calculation of Capital Dividend Account
CRA confirms that where a corporation has paid a capital dividend in Year 1 based on a capital gain realized by it in that year, a capital loss realized by it in Year 2 only affects the calculation of its capital dividend account going forward so that no Part III tax on the capital dividend is engaged.
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| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (a) | subsequent capital loss does not reduce capital dividend room | 73 |
IT-66R6 "Capital Dividends"
Subsection 184(3) - Election to treat excess as separate dividend
See Also
Morrissette v. The Queen, 2019 CCI 103
In 2011, a corporation (“9158”) paid a dividend (allegedly, a capital dividend) of $485,447 to its wholly-owning parent (“9102”), who paid a somewhat larger dividend (also allegedly a capital dividend) to the appellant. Although CRA on audit considered that $485,447 of the second dividend was an excess dividend referred to in s. 184(3), no Part III tax was assessed on the alleged basis that 9158 and 9102 each had made a s. 184(3) election (consented to by their shareholders) on $485,447, and assessed the appellant on the basis that he had received a taxable dividend of $485,447. The Crown brought a motion pursuant to Rule 53(1)(c) to strike the Notice of Appeal of the appellant as being abusive, arguing that such elections (which were admitted by the appellant to have been made, but only for the purpose of avoiding a Part III assessment, and not to preclude him from arguing for capital dividend treatment) rendered the appellant’s position in his Notice that he had received a capital dividend untenable.
Before denying the motion on the grounds that the respondent had not established that there was no reasonable prospect of the appeal succeeding, and after referring (at para. 16, TaxInterpretations translation) to the appellant’s submission that “there currently is an administrative practice known as the 'short-cut method' that had not yet been established in 2015, that permitted a taxpayer to make an election under subsection 184(3), which was kept in suspense pending a resolution of the litigation,” Smith J stated (at paras. 37, 38):
The issue for the respondent is that the mechanism contemplated by subsection 184(3) of the Act presupposed the sending of a notice of assessment for the additional tax under subsection 184(2). However, it appears evident that the Minister did not make such an assessment.
It could be that the administrative practice referred to above seeks to simplify the steps in according the taxpayer an advance notice by way of a proposal letter in the context of an audit, thereby permitting the taxpayer to make the election in question. However, the Court is not bound by administrative practices. … The Court cannot gloss over a legislative provision which requires the Minister to make an assessment permitting the taxpayer to then make an election. … I also note that clause 2106(a)(iv)(A) of the Regulation … requires that the taxpayer indicate “the date of the notice of assessment of the tax that would, but for the election, have been payable under Part III of the Act.” Since there was no assessment in the sense of subsection 184(3) of the Act, the Court can presume that such information was not available to the appellant and was not included with the documentation.
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| Tax Topics - Other Legislation/Constitution - Federal - Tax Court of Canada Rules (General Procedure) - Section 53 - Subsection 53(1) - Paragraph 53(1)(c) | Rule 53 does not authorize the rendering of a summary judgment | 218 |
Administrative Policy
6 October 2017 APFF Roundtable Q. 10, 2017-0709081C6 F - Election to treat excess as separate dividend
The s. 184(3)(b) excess dividend election is made respecting the amount of the original dividend that was payable. S. 184(3)(d) deems the shareholder to have received the excess dividend. Does the excess portion of a dividend, that was declared but not paid and that was elected upon under s. 184(3), remain non-taxable to the shareholder for so long as it remains unpaid? CRA responded:
[U]nder the current wording of subparagraph 184(3)(d)(ii), as the separate taxable dividend is deemed, for the purposes of paragraph 12(1)(j) and subsection 82(1), to have been received at the time the initial dividend was payable, such dividend may be taxed in a taxation year preceding the year in which the dividend was actually paid.
The CRA has already brought this matter to the attention of the Department of Finance.
Where an excessive capital dividend is made outside the reassessment period, will s. 184(3) apply? After referring to the 90-day period in the preamble to s. 184(3), CRA stated:
Thus, it would be possible to make an election under subsection 184(3) if a notice of reassessment were issued provided that the prescribed terms and conditions were followed and provided that the corporation elected not later than the 90th day on which the notice of reassessment was sent.
On the other hand, if the Minister could no longer assess under Part III, the condition for making an election under subsection 184(3) would not be satisfied given that the corporation would not have tax payable under Part III.
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| Tax Topics - Income Tax Act - Section 185 - Subsection 185(3) | normal reassessment period starts running from date of Pt III assessment | 148 |
6 October 2017 APFF Roundtable Q. 5, 2017-0709031C6 F - T2054 - Short Cut Method
In 2011-0412071C6 F, CRA indicated that if the corporation informs the local Tax Services Office that it wishes s. 184(3) to apply, the TSO will apply the "short-cut” method under which no Part III assessment will be issued to the corporation and only the shareholders will be reassessed to include the taxable dividends in their income. Is the short-cut method generally available or only in exceptional circumstances? CRA responded:
This administrative practice is still in effect and the CRA is generally prepared to apply it to a file, both at the taxpayer's request and during an audit of an election under subsection 83(2). The use of this method, however, remains in the discretion of the CRA to determine whether the circumstances of a file are appropriate for its application.
S3-F2-C1 - Capital Dividends
Examples of excess distributions
1.85 An overstatement of the CDA can arise in a number of ways. Examples include:
- a corporation might pay a capital dividend based on a capital gain reported in a particular year. But if a replacement property is acquired, the application of section 44 could retroactively reduce the previously reported capital gain.
- where an option is exercised in a tax year and an amended return is then filed to exclude the proceeds (reverse a previously reported capital gain that was relied upon to pay a capital dividend) from the granting of the option in a previous tax year.
- a corporation may claim a capital gains reserve at its year-end that exceeds the estimated reserve used to calculate the corporation’s CDA balance earlier in the year when an election was made to pay a capital dividend. ...
Holding election in abeyance until objection determined
1.93 Where a corporation has been assessed Part III tax in respect of an excessive election, the corporation may consider filing an objection to the determination of the CDA balance immediately before the dividend. It may also be permitted to file an election, in the time and manner required by subsection 184(3) (see ¶1.91), that will take effect if the objection is not successful. Under this arrangement, the CRA will hold the subsection 184(3) election in abeyance until the resolution of the corporation’s objection to the Part III tax assessment and any subsequent appeal to a court. If the corporation’s objection or subsequent appeal is ultimately allowed, the subsection 184(3) election will be withdrawn and treated as if it had never been made. If the corporation’s objection or ultimate appeal is dismissed, the subsection 184(3) election will be treated as having been made in a timely manner and as valid.
4 December 2013 External T.I. 2013-0504951E5 - Objection Part III Tax -184(3) Election
Aco, which had a capital dividend account of $100, paid a dividend to its sole shareholder, Bco and elected for the dividend to be a capital dividend. Bco, in turn, paid a $100 dividend to its sole shareholder, Mr. X, and elected for the dividend to be a capital dividend. CRA disallowed the capital dividend paid by Aco under s. 83(2.1) and, as a consequence, assessed Bco for Part III tax.
Bco wishes to object to the Part III assessment, but at the same time preserve its ability to file an election under s. 184(3) (which must be filed within 90 days of the assessment) to treat the dividend as a taxable dividend in the event its objection is unsuccessful.
After referring to the position in 2007-0221211I7 that CRA was technically unable to defer the processing of an s. 184(3) election until the ultimate resolution of an objection to the Part III tax assessment, CRA stated:
This position has now been changed… . CRA is now generally accepting to hold in abeyance a subsection 184(3) election filed on a timely manner until the resolution of the objection and subsequent appeal to court, if any, of the Part III tax assessment. In the event that the taxpayer's objection (or subsequent appeal) is ultimately allowed, the subsection 184(3) election would be withdrawn and treated as if it had never been made. In the event that the taxpayer's objection (or subsequent appeal) is ultimately dismissed, the subsection 184(3) election would be treated as valid and having been made in a timely manner.
7 October 2011 APFF Roundtable Q. 4, 2011-0412071C6 F - Modifying a Capital Dividend Election
Where the directors declare a capital dividend and before the payment date for the dividend the corporation (which has individual shareholders) realizes a capital loss that causes the capital dividend account to be less than the amount of the capital dividend, the fact of there being an excessive capital dividend will not be solved by the corporation passing a further resolution, before the payment date, to split the dividend in two (given that the original dividend declaration continues to be valid). However, if the corporation informs the local Tax Services Office that it wishes s. 184(3) to apply, the TSO will apply the "short cut method" under which no Part III assessment will be issued to the corporation and only the shareholders will be reassessed to include the taxable dividends in their income.
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| Tax Topics - General Concepts - Effective Date | originally declared dividend not altered by subsequent resolution | 81 |
8 October 2010 Roundtable, 2010-0373261C6 F - Choix prévu au paragraphe 184(3)
After a corporation is assessed under s. 184(2) in respect of an excess dividend following an audit of the calculation of its capital dividend account, and rather than making the election within 90 days under s. 184(3) and convert the excess dividend into a taxable dividend, it files a notice of objection thereto, but is ultimately unsuccessful and the assessment previously made is maintained. Does this come within the statement in IC07-1 as to potential relief where “[t]here have been tax consequences not intended by the taxpayer, and there is evidence that the taxpayer took reasonable steps to comply with the law,” so that CRA could accept a late election under s. 220(3.2) to convert the excess dividend into a taxable dividend under s. 184(3)? CRA responded:
[T]he Minister is not required to provide … relief under subsections 220(3.1) and (3.2), and it is not the CRA's policy to automatically waive penalties or accept a request for an extension of time or a request to revoke an election by virtue of subsections 220(3).(1) and (3.2). …
[A]s a matter of first impression, it cannot be assumed that a request for an extension of time under subsection 220(3.2) to file an election under subsection 184(3) would necessarily be denied in a particular situation similar to the given hypothetical situation.
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| Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.5) | no policy to automatically waive penalty where late s. 184(3) election, following failed appeal, is granted | 165 |
May 1999 CALU Conference No. 9908430, Q. 2
As s. 184(3) only deals with the excess of the full amount of a dividend over the capital dividend account, there is no scope for the Department to accept an election on a larger amount.
IT-66R6 "Capital Dividends"
Subsection 184(3.1)
Cases
Special Risks Holdings Inc. v. The Queen, 88 DTC 6444 (FCTD), aff'd 89 DTC 5039 (FCA)
After being assessed for Part III tax, the taxpayer made an election under s. 184(3.1) on the understanding, shared by MNR, that the provision would have no operative effect pending a final determination of the issue between the taxpayer and MNR as to the taxpayer's liability under Part III. The Federal Court had jurisdiction under s. 18 of the Federal Court Act to consider a request by the taxpayer, following the final adverse disposition of its appeal from the assessment by the Court of Appeal, to obtain a refund of tax on the basis of the election. The s. 184(3.1) issue was entirely separate because it could not have been raised until the assessment issue was decided. There also was an arguable case that s. 184(3.1) was a remedial section which applies even to assessments which are final and binding. In the Court of Appeal, Marceau J. indicated that s. 184(3.1) was meant to benefit corporations bound by final assessments, regardless whether the assessments were valid because of a court judgment or as a result of the passage of time.