Section 83

Immediately prior to closing a sale of a private corporation, its shareholder wishes to have all of the capital dividend account distributed to it, but the precise CDA balance cannot be known until year end when the accounts are finalized. Would CRA accept a resolution of the directors and a T2054 form where the amount of the capital dividend was shown only by a mathematical formula, i.e., it would be, at the time of signing, a determinable, but not a determined, amount?

CRA responded:

Subsection 83(2) allows a private corporation to make an election (the "Election") to deem a dividend to have been paid out of its CDA. [Reg.] 2101 … requires the corporation to file with the Minister, inter alia, the prescribed form and a certified copy of the resolution … .

The CRA expects that such a resolution will refer to the amount of the dividend covered by the election, which should be the amount reported on Form T2054.

The CRA does not intend to adopt an administrative policy with respect to the situation described in the statement of this question.

In closing, it should be noted that the maximum amount of the penalty assessed under subsection 83(4) is $41.67 for each month or part of a month between the due date for filing the Election and the day the Election is filed.

The questioner, after noting that the payment of capital dividends only to taxable shareholders of a private company and not to its- tax-exempt shareholders, can also be avoided by redemption transactions targeted to the taxable shareholders, then asked whether:

it is indeed possible to pay a non-taxable dividend out of the CDA to Series 1 shareholders of the same class of shares while Series 2 shareholders of the same class of shares will receive a taxable ("eligible" or "other than eligible") dividend?

CRA responded:

Under subsection 248(6), where a corporation issues shares of a class of its capital stock in one or more series, each series is to be treated as a class of shares for the purposes of the Income Tax Act.

Thus, to the extent that the applicable corporate law allows the corporation to pay a separate dividend on a series of shares of a given class of its capital stock … the election provided for in subsection 83(2) could be made with respect to the dividend that became payable on that series.

Furthermore … if it were the case that certain reorganizations or conversions of shares carried out through a transaction, or as part of a series of transactions, one of the main purposes of which is to enable shareholders to receive capital dividends, then the application of subsection 83(2.1) should be considered.

CRA does not plan to adopt an administrative position which would allow a private corporation to make a s. 83(2) election with respect to a dividend deemed to be paid by it under s. 84.1(1)(b) to a person who is not already a shareholder of the corporation.

Mr. X transfers high-low preferred shares of Opco 1 to Opco 2 (both held by him and related persons) in consideration for a note, such that he is deemed by s. 84.1(1)(b) to receive a dividend. In finding that Opco 2 elected under s. 83(2) for the dividend to be a capital dividend CRA stated:

For the purposes of subsections 84.1(1) and 83(2), subsection 84(7) provides that a dividend deemed to have been paid pursuant to section 84.1 is deemed to have become payable at that time.

On the issue of whether a subsection 83(2) election is available to a corporation in respect of a dividend that it is deemed to have paid pursuant to paragraph 84.1(1)(b), we are of the view that such an election is available if such a dividend becomes payable by a private corporation to a shareholder who already holds shares of any class of the corporation's capital stock … .

An individual disposed of all of the shares of a private corporation to a corporation wholly owned by his wife (OP2) in consideration for a note of OP2, and wished for OP2 to elect under s. 83(2) for the dividend that was deemed to be received by him pursuant to s. 84.1(1)(b) to come out of OP2’s capital dividend account (CDA). CCRA indicated that this election was not available as there was no provision deeming the individual to hold shares of OP2. Similarly, the deemed dividend did not generate a dividend refund to OP2, so that 9729855 no longer represented the CCRA position.

No provision permits a late election.

ACO (a CCPC) has three corporate shareholders, each holding 10 Class A common shares in its capital: BCO (exempt under s. 149(1)); CCO (a non-resident); and DCO (a taxable CCPC).

After ACO realizes a capital gain on a disposition to a third party that generates a capital dividend account of $100, DCO exchanges its 10 Class A common shares under s. 51 for 10 Class B common shares. ACO then pays a capital dividend of $100 on the Class B common shares.

Before intimating that s. 83(2.1) likely would not apply to the streaming of the CDA to DCO because it was one of the original shareholders, CRA stated:

For the purposes of applying subsection 83(2.1), the CRA has traditionally considered that it is the main purpose of the original acquisition of the shares that must be taken into account when they are exchanged for shares of another class upon reclassification of the capital stock of the corporation. In addition, the CRA is generally of the view that subsection 83(2.1) does not apply to transactions that result in the payment of a capital dividend to certain original shareholders of the corporation. Such positions are largely based on the legislative intent of subsection 83(2.1), which is to prevent a corporation from transferring the balance of its CDA to another corporation or person by selling shares of its capital stock.

CRA confirmed that since s. 248(6) requires a series of shares to be treated as a separate class, a capital dividend could be paid by a private corporation to the holders of only one of the series of shares of a class. Before asking about this, the questioner had commented that the payment of capital dividends only to taxable shareholders of a private company and not to its tax-exempt shareholders, can also be avoided by redemption transactions targeted to the taxable shareholders. CRA, in its response, added:

Furthermore … if it were the case that certain reorganizations or conversions of shares carried out through a transaction, or as part of a series of transactions, one of the main purposes of which is to enable shareholders to receive capital dividends, then the application of subsection 83(2.1) should be considered

Canco was the owner and beneficiary of a life insurance policy, with an adjusted cost basis of nil, on the life of its sole shareholder, Mr. X. Following the receipt of $500,000 under the policy on Mr. X’s death, Canco reduced an outstanding loan by $200,000 and paid a $250,000 capital dividend to the estate, retaining the balance of $50,000 in working capital. The estate sold the Canco shares to Ms Y, an unrelated Canadian resident. Alternatively, Mr. X owned Canco indirectly through Holdco, so that the estate of Mr. X sold Holdco to Ms Y. Could Ms Y eventually receive a capital dividend from the CDA balance of either Canco or Holdco? CRA responded:

[T]he CDA balance of Canco would not consist of amounts described in paragraphs 83(2.2)(a) to (d) (such CDA balance being only attributable to an insurance policy proceeds in this scenario). Consequently, subsection 83(2.1) would not apply to deem a capital dividend received by Ms Y … to be a taxable dividend.

After indicating that s. 83(2.1) also would not apply in the Holdco scenario, CRA stated:

Finally, subsection 83(2.3) provides that subsection 83(2.1) will not apply to a capital dividend paid by a corporation in order to distribute life insurance proceeds which were received by it and included in its capital dividend account as a consequence of the death of a person. Subsection 83(2.1) does not apply where a capital dividend funded by life insurance proceeds is paid to an individual either directly or through a holding corporation by reason of the exception provided in paragraph 83(2.2)(a).

…Thus, assuming that Canco’s assets consist only of $50,000 cash which is funded by life insurance proceeds, the provision 83(2.3) could apply to a capital dividend equal to this amount.

An estate sold a private company (Canco 1) to a third party purchaser, which promptly amalgamated with Canco 1. To the surprise of the estate, the estate beneficiary (the deceased's widow) then received a cheque under a policy under which Canco 1 had been the beneficiary, which she deposited in an account in Canco 1's name.

Since additions to the capital dividend account for life insurance proceeds occur on a received rather than receivable basis, the cheque was an addition to the CDA of Amalco rather than of Canco 1. The Amalco shareholders were willing to have Amalco pay a capital dividend to them equal to the insurance proceeds and to pay those proceeds over to the widow net of Amalco’s transaction costs, provided that CRA first ruled that the Policy proceeds increased Amalco's CDA, and that s. 83(2.1) would not apply to the dividend (given the purchaser not being aware of the Policy).

Where the shares of a corporation ("Opco") having a capital dividend account are transferred by a related individual to a newly-incorporated holding corporation (which then receives a capital dividend from Opco), RC generally will look to the main purpose for the original acquisition by the individual of the Opco shares in making the determination under s. 83(2.1).

An estate owns all the shares of Corporation A, which has a capital dividend account (CDA) and refundable dividend tax on hand account (RDTOH) but owns no assets. The estate sells its shares to Corporation X, which has assets but not CDA or RDTOH - following which Corporation A and Corporation X amalgamate, with the amalgamating corporation paying a capital dividend to Corporation X. One of the main purposes of these transactions was to allow Corporation X to benefit from Corporation A's CDA and RDTOH

CRA indicated that prima facie s. 83(2.1) would apply to a dividend paid by Corporation A to Corporation X, given the stated main purpose. However, the exception in s. 83(2.4) would need to be reviewed, as to which insufficient facts were provided. In the context of there having been an amalgamation, s. 87(2)(z.1) provided that if a capital dividend were paid by a predecessor corporation and a portion thereof would be deemed to be a taxable dividend by s. 83(2.1), the CDA of the predecessor corporation is not transferred to the amalgamated corporation – so that it would thus be necessary to determine whether all or substantially all of Corporation A's CDA, immediately before the payment of such a dividend, could reasonably be considered to consist of amounts not described in paras. (a) to (e) of subsection 83(2.4). In particular, there was insufficient information to determine if any part of the CDA of Corporation A represented an amount of CDA realized by a corporation before it became related to Corporation X.

Where an individual transfers shares in a related corporation having a capital dividend account to a newly-incorporated holding corporation in exchange for shares of the holding corporation, and the corporation pays a capital dividend to the new holding corporation, it would appear that the capital dividend would not be exempted by s. 83(2.4)(b) because the corporation's capital dividend account would have arisen before it became related to the holding corporation.

Must the advance authorization (described in s. 83(3)(c)) by the directors be made before the declaration of the dividend or merely before the late election? CRA responded:

The condition set out in paragraph 83(3)(c) is satisfied when the directors or other person or persons legally entitled to administer the affairs of the corporation have, before the time the election is made, authorized the election to be made.

CRA then referred to Folio S3-F2-C1, para. 1.21.

On January 1, Corporation A paid a capital dividend of $40,000 to its sole shareholder, Corporation B, but did not make a late capital dividend election until September 1. On January 2, Corporation B paid a capital dividend of $40,000 to its sole shareholder, Mr. B, but did not make a late capital dividend election until September 1. Could Corporation B include in its capital dividend account, on January 2, the $40,000 dividend it received out of Company A's capital dividend account?

After noting that the effect of s. 83(3) was that “the shareholder could add the dividend received to the shareholder’s capital dividend account at the time of receipt of the dividend,” CRA further noted that as Corporation A had made a valid late election “the election would be deemed to have been made on January 1,” so that “starting January 1, Corporation B could add the $40,000 dividend amount to its capital dividend account. Similarly:

On September 1, Corporation B filed Form T2054 and made a late election in accordance with the terms of subsection 83(3), including, inter alia, the payment of the penalty. Mr. B thereby received on January 2 a capital dividend that would not be required to be included in computing his income.

CRA never received a s. 83(2) election in respect of a dividend payable in 1997 by Yco to its sole shareholder, an individual ("Y"). The normal reassessment period for Y and Yco had expired.

The Directorate indicated that CRA should request, under s. 83(3.1), that a late election be made under s. 83(3) be made by Yco. If Yco complied within the 90-day period, it would be required to pay an estimate of the late-filing penalty, and CRA would assess under s. 83(5). There would be discretion under s. 220(3.1) to waive penalty or interest.

If Yco did not so comply, consideration would be given to assessing Y beyond the normal reassessment period for a taxable dividend under s. 152(4)(a)(i).