Subsection 184(2) - Tax on excessive elections
IT-66R6 "Capital Dividends"
Subsection 184(3) - Election to treat excess as separate dividend
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|
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.
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.
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.
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 susequent resolution||81|
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"
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.