Section 184

Subsection 184(2) - Tax on excessive elections

Administrative Policy

22 January 2019 External T.I. 2019-0791631E5 - Calculation of Capital Dividend Account

subsequent capital loss did not generate excessive dividend

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (a) subsequent capital loss does not reduce capital dividend room 79

Subsection 184(3) - Election to treat excess as separate dividend

See Also

Magren Holdings Ltd. v. The Queen, 2021 TCC 42

election was not available where a CDA sham

The appellants engaged in transactions which were intended to result in the realization by them of substantial capital gains (resulting in additions to their capital dividend accounts), that were immediately distributed by them), followed by the realization of largely offsetting capital losses later that day. These transactions depended in part on the appellants being considered to have transferred the acquired units of an income fund (“FMO”) at a cost equaling the units’ FMV followed immediately by a distribution to them of capital gains that had been realized by TOM – with that distribution not reducing the ACB of their units by virtue of s. 53(2)(h)(i.1)(A) and (B)((I). Accordingly, such repurchases were intended to result in the realization of largely offsetting capital losses.

Smith J found that, in light, inter alia, of the very transitory nature of the appellants’ holding of the TOM units, that the appellants had not acquired the beneficial ownership of the FMO units, so that their purported disposition on their repurchase did not generate the capital losses. In going on to find that the acquisitions and repurchases also were shams, he stated, inter alia (at paras. 224-225):

[I]t cannot be said that the alleged transaction by which FMO repurchased its units for cancellation resulted in ‘real’ capital losses. These were mere paper transactions ... allegedly supported by demand promissory notes that the Appellants would never be called upon to honour and that were issued and cancelled on December 28, 2005.

I agree with the Respondent, relying on Triad Gestco ... “that the Appellants did not enjoy a ‘real’ economic gain nor a real economic loss”.

He went on to find that because the s. 184(3) election to convert excess capital dividends into ordinary dividends

is intended to allow corporations “to correct their mistake and avoid the special tax provided under Part III” but it is not intended that the provision will apply where “the initial CDA was sham (sic), and those claiming the benefit of Part III are the authors of the sham” (para. 235)

such elections were invalid.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 185 - Subsection 185(3) Part III tax assessments of distributions of gains that were denied outside the Part I tax normal reassessment period were not statute-barred 314
Tax Topics - Income Tax Act - Section 185 - Subsection 185(1) no requirement to issue separate assessment for each election, and no remedy for inordinate time to issue assessments 396
Tax Topics - General Concepts - Ownership acquisition of income fund units to be held for a few days before their redemption did not represent an acquisition of beneficial ownership 549
Tax Topics - General Concepts - Sham transactions did not result in real capital losses 306
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) no CDA addition where capital gains were not real 373

Morissette v. The Queen, 2019 CCI 103

validity of taxable dividend arising from s. 184(3) election appears to depend on Part III assessment first having been made

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.

Locations of other summaries Wordcount
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 228

Administrative Policy

8 October 2021 APFF Roundtable, Q.10

CRA generally will accept the concurrence by a share vendor to an s. 184(3) election in advance of the excessive eligible dividend being identified

Vendors may proceed with a preliminary reorganization before a share sale and agree in advance that an s. 184(3) election will be made in the event of it being identified that there has been an excessive capital dividend designation.

  1. Will CRA accept an advance concurrence to the making of the election, where the shareholder concerned has no involvement when the election is made?
  2. Are T5 slips required where the election is made?

CRA responded:

(a)

… In a context similar to that described in the statement of this question, the CRA generally accepts that shareholders may give their concurrence in advance, through undertakings under the various sale agreements, to the making of [the] election … .

(b)

…When a subsection 184(3) election is filed, additional T5 slips must usually be filed. However, since in such circumstances the number of shareholders is generally small and their respective returns have generally been assessed at the time the 184(3) election is filed, the CRA will not request the preparation of T5 slips in respect of that election unless the circumstances make that procedure practical.

However, if an excessive capital dividend is identified in the year it is paid or payable, the corporation will have to file additional T5 slips by the last day of February of the following year … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 185.1 - Subsection 185.1(3) concurrence can be given to the election in a share sale agreement before the excessive eligible dividend designation is identified 174

6 October 2017 APFF Roundtable Q. 10, 2017-0709081C6 F - Election to treat excess as separate dividend

elected-upon amount is retroactively deemed as income even if it is still unpaid

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 185 - Subsection 185(3) normal reassessment period starts running from date of Pt III assessment 158

6 October 2017 APFF Roundtable Q. 5, 2017-0709031C6 F - T2054 - Short Cut Method

the “short-cut method” for short-circuiting a Pt III assessment is “generally" available

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

election conditional on unsuccessful objection

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

short-cut method for direct assessment of shareholders for excess amount

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.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date originally declared dividend not altered by subsequent resolution 83

8 October 2010 Roundtable, 2010-0373261C6 F - Choix prévu au paragraphe 184(3)

permission to late-file a s. 184(3) after an objection has failed might be granted

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.

Locations of other summaries Wordcount
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 175

5 December 2007 Internal T.I. 2007-0221211I7 F - Capital Dividends

A private corporation (Aco), which had paid a capital dividend out of what it believed to be a capital dividend account balance generated by a property sale, was reassessed by CRA for Pt. I tax on the basis that the disposition was on income account, and also for Pt. III for the alleged excessive capital dividend. Aco suggested that upon filing its Notice of Objection to the Pt. I and III tax reassessments, Aco would file a s. 184(3) election but would request that CRA not deal with that election until the Court had ruled in CRA’s favour. In rejecting this suggestion, the Directorate stated:

[I]n order for the AB [Appeals Branch] with all due dispatch to conduct a review of the assessment of Pt. III tax under the Act and make a decision to either vacate, confirm or vary it by virtue of subsection 165(3), the review of the assessment must take into account the 184(3) Election filed by the corporation, that is, not only to determine the validity of that 184(3) Election but also, if applicable, to give immediate effect to it by cancelling the assessment of Pt. III tax payable by the corporation and the assessment of Pt. I tax payable by its shareholders for whom the 184(3) Election applies.

Thus, in the particular situation, for the reasons set out above, we are of the view that, technically, the ABSB should not suspend the processing of Aco's valid 184(3) Election but rather should proceed with it and, as a result, the AB should cancel the assessment of the Pt. III tax payable by Aco pursuant to subsection 165(3) and the ABSB should assess the Pt. I tax payable by the Aco shareholder to whom the 184(3) Election applies.

Other locations for this summary
Tax Topics - Income Tax Act - Section 165 - Subsection 165(3) suggesting awaiting by CRA of a court resolution of a related dispute would be contrary to its duty to act with all due dispatch
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 184 - Subsection 184(3) CRA will not accommodate appeal of underlying Pt. I and III assessments by agreeing to act on a waiver if appeal successful or by deferred processing of a s. 184(3) election 296

5 December 2007 Internal T.I. 2007-0221211I7 F - Capital Dividends

CRA will not accommodate appeal of underlying Pt. I and III assessments by agreeing to act on a waiver if appeal successful or by deferred processing of a s. 184(3) election

A private corporation (Aco), which had paid a capital dividend out of what it believed to be a capital dividend account balance generated by a property sale, was reassessed by CRA for Pt. I tax on the basis that the disposition was on income account, and also for Pt. III for the alleged excessive capital dividend. The Directorate rejected various procedural solutions suggested by Aco (which did not initially make a s. 184(3) election) for eliminating its Pt. III tax and generating a taxable dividend to Aco’s sole shareholder:

  • Following the Court's dismissal of Aco's appeal, Aco would apply for an extension pursuant to s. 220(3.2) to file the s. 184(3) election, and CRA would undertake in advance to accept this request.
  • Upon filing its Notice of Objection to the Pt. I and III tax reassessments, Aco would file a s. 184(3) election but would request that CRA not deal with that election until the Court had ruled in CRA’s favour.
  • Aco would only file a Notice of Objection respecting the Pt. I tax reassessment ­­and a s. 184(3) election, with the sole shareholder timely objecting to the Notice of Assessment received, but with CRA agreeing to deal with the shareholder's Notice of Objection only after Aco's Notice of Objection had been finally resolved, and with the shareholder deferring payment of the assessed tax until the objection was resolved.
  • Aco would only file a Notice of Objection respecting the Pt. I tax reassessment ­­and a s. 184(3) election, with the sole shareholder, rather than objecting to the Notice of Assessment received, providing CRA with a waiver to allow CRA to reverse the taxable dividend once Aco succeeded in court, with CRA agreeing to so reassess in such event.
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 184 - Subsection 184(3) 293
Tax Topics - Income Tax Act - Section 165 - Subsection 165(3) suggesting awaiting by CRA of a court resolution of a related dispute would be contrary to its duty to act with all due dispatch

14 June 2007 Internal T.I. 2007-0229311I7 F - Capital Dividend Account

invalid payment of capital dividend (because no payment) was subject to Pt. III tax (given valid s. 83(2) election) for which no s. 184(3) election could be made as no payment

Subco declared a dividend payable to its parent (Parentco) which, in turn, declared a corresponding dividend to its individual shareholder (Mr. A), with a s. 83(2) election being made in both cases. After finding that such dividends were not paid since there were only accounting entries to accomplish the payments, the Directorate noted that there nonetheless was Part III tax payable because valid s. 83(2) elections had been made, and that the s. 184(3) election was unavailable because:

[I]n order for Mr. A to be taxed on the deemed separate taxable dividend pursuant to paragraph 184(3)(c), he must have received the dividend in question. As noted above, the mere making of the accounting entries … does not in itself constitute the payment by Parentco and receipt by Mr. A of a dividend … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (b) recording of dividend payable and dividend receivable between sub and parent was insufficient to constitute the payment of a capital dividend, so that there was no CDA addition 132
Tax Topics - General Concepts - Payment & Receipt making accounting entries does not constitute payment of a dividend 130
Tax Topics - General Concepts - Effective Date a declared dividend cannot be revoked 158

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.

Paragraph 184(3)(d)

Administrative Policy

29 June 2007 Internal T.I. 2007-0229431I7 F - Excessive Capital Dividend

proration approach applied where dividend not fully paid

A corporation owed a dividend, interest and salary and wages to its shareholders, and effected part payment by way of set off. The total amount of the dividend was elected upon as a capital dividend, but on audit, such dividend amount was determined to exceed the corporation’s capital dividend account. The Directorate indicated that the excessive dividend paid for s. 184(3(d) purposes was to be computed by multiplying the amount paid divided by the proportion the excessive dividend was of the total dividend payable.

Subsection 184(3.1)

Cases

Special Risks Holdings Inc. v. The Queen, 88 DTC 6444, [1988] 2 CTC 244 (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.

Subsection 184(4)

Administrative Policy

21 April 2008 External T.I. 2007-0220471E5 F - Excessive Capital Dividend and 220(3.2)

no s. 184(4) election available where one of the shareholders was dissolved

After a corporation paid a capital dividend to its two shareholders and before CRA assessed to reduce the corporation’s capital dividend account, one of the two shareholders (“SC”) was dissolved. Would the corporation be permitted as an administrative matter to make the s. 184(3) election, notwithstanding such dissolution? CRA responded:

[T]echnically, the Corporation could not make the subsection 184(3) election. Furthermore, if SC were a "cooperative corporation", as defined in subsection 136(2), our view would be the same.

Furthermore, we do not intend to propose to the Department of Finance that the conditions for making an election by virtue of subsection 184(3) be changed, since there is a valid legislative alternative … . In such a situation, a corporation may apply to the Minister by virtue of subsection 220(3.2) to revoke its election under subsection 83(2) in respect of the dividend it has paid.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.2) s. 220(3.2) revocation is an alternative if a s. 184(4) election cannot be made 66