Cases
Canada v. Innovative Installation Inc., 2010 DTC 5175 [at 7317], 2010 FCA 285
In order to ensure payment of a loan owing by the taxpayer ("Innovative") to a bank (RBC) on the death of Innovative's principal (Mr Peacock), Innovative purchased key man insurance from Sun Life with RBC as the policyholder and funded the payment of premiums on the policy. When Mr Peacock died, Sun Life paid the insurance proceeds to RBC, which was contractually obliged to apply them to discharge the loan.
Evans JA found (at para. 6) that, for the purposes of determining Innovative's capital dividend account, "Innovative 'received' 'proceeds of a life insurance policy' when RBC applied them, as the contract required, to discharge Innovative's debt," and stated (at para. 9):
Paragraph 89(1)(d) does not require that a corporation receive the proceeds directly from the insurer or that it be named as the beneficiary of the policy. It only had to have "received" them in consequence of Mr Peacock's death.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Payment & Receipt | indirect receipt through debt repayment | 156 |
See Also
Csi Development Corp. v. R., 99 DTC 1139, [1999] 3 CTC 2421 (TCC)
McArthur TCJ. found that the amount added to the taxpayer's capital dividend account as the result of the realization by a partnership of an eligible capital amount should be based on the taxpayer's portion of the partnership's taxable income, rather than being 100% of the non-taxable portion of the receipt, as contended by the taxpayer.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Statutory Interpretation - Interpretation Bulletins, etc. | 79 |
Administrative Policy
3 December 2015 External T.I. 2015-0613761E5 F - Capital Dividend Account
Where a corporation donates ecologically sensitive lands so as to be eligible for the s. 110.1(1)(d) deduction, what amount will be added to its capital dividend account? CRA responded (TaxInterpretations translation):
[S]ubparagraph 38(a.2)(i) provides that the taxable capital gain resulting from the disposition of such property to a qualified donee described in subsection 149.1(1) (other than a private foundation) is equal to zero. Consequently, by virtue of the definition of capital dividend account provided in subsection 89(1), the capital gain resulting from such a disposition would be included by virtue of clause (a)(i)(A) of the definition as there would be no amount of taxable capital gain as described by clause (a)(i)(B) taking subparagraph 38(a.2)(i) into account. Accordingly, the full amount of the capital gain resulting from the disposition would be included in the capital dividend account of the corporation.
9 October 2015 APFF Roundtable Q. 6, 2015-0595551C6 F - Capital Dividend Account
If Holdco (a CCPC) has realized $1M in allowable capital losses on its public company portfolio, its subsidiary (Opco) has realized a $1M taxable capital gain from the sale of its operating business, and Opco then pays a capital dividend of $1M to Holdco, Holdco will have a resulting positive capital dividend account balance of $1M, as para. (a) of the CDA definition (respecting the non-taxable portion or non-deductible portion of capital gains or losses) will not reduce the positive CDA balance arising under para. (b) of the CDA definition from the receipt of the dividend – so that Holdco can then pay a capital dividend of $1M to its individual shareholder. However, if this dividend is not paid, the ability to do so will disappear if Holdco then amalgamates with Opco, as this will cause the CDA balance to go down to nil.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(z.1) | amalgamation can cause a combined positive CDA balance to be zeroed | 161 |
18 August 2014 External T.I. 2014-0540361E5 F - CDA and the deeming rules of 40(3.6) or 112(3)
A corporation's capital dividend accounts will not be reduced by a loss on the redemption of shares held by it where such loss is deemed to be nil by s. 40(3.6) or 112(3), given that where s. 40(3.6) or 112(3) applies to deem its loss to be nil, it is not considered to have sustained a loss for the purpose of s. 39(1)(b). After referring to the "except as otherwise expressly provided" reference in the s. 40(1) preamble, CRA stated (TaxInterpretations translation):
Our longstanding position is…that subsection 112(3) is an express contrary indication. In accordance with subsection 112(3), the amount of a loss as [otherwise] calculated…is reduced in accordance with that subsection. The resulting loss...is considered to be the loss determined in accordance with paragraph 40(1)(b).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(b) | ss. 112(3) and 40(3.6) stop-loss rules modify operation of s. 40(1)(b) | 128 |
19 December 2013 Internal T.I. 2013-0490751I7 - Adjustment to a taxpayer`s CDA
The taxpayer, which was a private corporation, disposed of eligible capital property to a non-arm's-length non-resident sister company ("SisterCo") within the same multinational group in consideration for a promissory note. Audit proposed to apply s. 247(2) to increase the proceeds from the disposition. CRA stated:
[T]he proposed adjustment will result in an increase in the taxpayer's CDA effective to the date of the disputed transaction on the basis of the wording of subsection 247(2) and paragraph (c.2) of the definition of CDA… .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(8) | s. 247(2) trumps s. 69(1) | 80 |
25 March 2013 External T.I. 2012-0447171E5 - Creditor's Group Life Insurance and CDA
Creditor's group life insurance products generally have no cash surrender value, premiums payable with respect to a particular debtor for this type of products are generally calculated to cover the cost of insurance over the term of the certificate, that is, the term of the loan, and if an ACB calculation were effected with respect to each particular certificate holder, the result would generally be a very low figure, if not nil. On the basis of this understanding:
CRA is prepared to accept that the full amount of the death benefit be added to the corporate debtor's CDA, without a reduction by the ACB.
24 May 2012 External T.I. 2012-0441151E5 - Donation of flow-through shares - 40(12) and CDA
Where a private corporation holding flow-through shares as capital property gifts the shares to a qualified donee, it will include the capital gain from the gift in computing its CDA, but deduct an amount equal to the taxable portion of the deemed capital gain under s. 40(12).
8 May 2012 CALU Roundtable Q. 6, 2012-043564
Shareholders of a corporation use a buy-sell agreement to requires the corporation to acquire insurance on the shareholders' lives (and pay the premiums thereunder) to fund share purchase obligations under the agreement, and further agree to use a third party (the "Insurance Trustee") to hold and apply the insurance proceeds as directed under the agreement, with the corporation being required to pay any insurance proceeds over to the Insurance Trustee upon receipt. Before indicating that such proceeds would be added to the capital dividend account of the corporation as amounts received by it, CRA stated:
A trustee can reasonably be considered to act as agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee's only function is to hold legal title to the property. In order for the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trust to consult and take instructions from each and every beneficiary with respect to all dealings with all of the trust property.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(1) | holder of insurance proceeds as agent | 194 |
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account | 115 | |
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account | 124 |
8 May 2012 CALU Roundtable Q. 6, 2012-043564
On the same facts as for Q. 6.1 above except that the buy-sell agreement gives an irrevocable direction to the insurer to pay the proceeds over to the Insurance Trustee upon the death of a shareholder, CRA stated:
if the Insurance Trustee can reasonably be considered to act as agent for its sole beneficiary Corporation A such that the arrangement is deemed not to be a trust for the purposes of the Act, Corporation A may generally be considered to have received insurance proceeds for purposes of its capital dividend account provided that the irrevocable direction given by Corporation A to the insurer would not in any way negate the agency relationship between Corporation A and the Insurance Trustee.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(1) | holder of insurance proceeds as agent | 194 |
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account | 115 | |
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account | 194 |
8 May 2012 CALU Roundtable Q. 6, 2012-043564
On the same facts as for Q. 6.1 above except that the insurance policy names the Insurance Trustee as the beneficiary of the policy, for example, "as beneficiary in trust as bare trustee for the Corporation" - or simply names the Insurance Trustee without specific reference to its capacity as a bare trustee or agent, CRA stated:
if the Insurance Trustee can reasonably be considered to act as agent for its sole beneficiary Corporation A such that the arrangement is deemed not to be a trust for the purposes of the Act, Corporation A would generally be considered to have received insurance proceeds for purposes of its capital dividend account.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(1) | holder of insurance proceeds as agent | 194 |
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account | 124 | |
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account | 194 |
18 June 2007 External T.I. 2006-0215001E5 - Capital Dividend Account
Each of the partners of a partnership with a fiscal period end of April 30, 200X and which disposed of eligible capital property in that year is a Canadian-controlled private corporation. CRA stated:
[T]he corporate partner's share of an amount required by paragraph 14(1)(b)…to be included in the partnership's income for its fiscal period ending April 30, 2000X would be included in the particular corporate partner's computation of its CDA at the end of the partnership's fiscal period such that it would be available to be paid to the corporate partner's shareholders as a capital dividend on or after May 1, 200X.
16 August 2004 External T.I. 2004-0090461E5 - Computation of Balance in Capital Dividend Account
A capital gains reserve taken in a taxation year will be included in the calculation of the capital dividend account balance on the first day of the subsequent taxation year.
4 December 2003 External T.I. 2003-0038595 - CAPITAL DIVIDEND ACCOUNT
"We would normally expect the partnership agreement to determine a particular partner's share of a capital dividend received by the partnership and the timing of its inclusion in the CDA of the partner. For example, if the partnership agreement provides that a particular corporate partner is entitled to a share of a capital dividend at the time the dividend is received by the partnership, we would allow that partner to include its share of the dividend in its CDA at that time. However, if the partnership agreement provides that a capital dividend received by the partnership is to be shared by the members of the partnership at the end of the partnership's fiscal period, a particular corporate partner would only be permitted to include its share of that dividend in its CDA at that time."
21 March 2002 External T.I. 2001-0115265 F - 89(1)(c.1)(i)&(c.2)(i) Capital Div. Acc.
As a result of the amendments associated with the introduction of ss. (c.1)(i) and (c.2)(i) of the definition of CDA for taxation years ending after February 27, 2000, an addition to the CDA as a result of a disposition of goodwill can only be accessed through a capital dividend following the taxation year in which the disposition occurred. CCRA stated:
[T]he amount, if any, included in income under paragraph 14(1)(b) can only be determined at the end of a taxation year (i.e., when the corporation's corresponding accounts for the period are closed out). Consequently, a corporation may only include an amount in its CDA, in respect of the disposition of goodwill relating to a business, at the end of the taxation year in which the disposition occurred.
Furthermore … paragraph 83(2)(a) deems [an s. 83(2)] dividend to be a "capital dividend" to the extent of the amount of the corporation's CDA immediately before the particular time.
22 November 2000 External T.I. 2000-0049415 - Dividends - General
"Where, for example, a particular corporation is a member of a partnership which realized a capital gain in its fiscal period ending April 30, 2001 and the corporation's taxation year ends on December 31, the corporate partner's share of the capital gain, (including the untaxed portion thereof), would be added to the partner's CDA at April 30, 2001, i.e., in the corporate partner's taxation year ending December 31, 2001."
26 June 1998 External T.I. 9729995 - 89(1), CAPITAL DIVIDEND ACCOUNT
Because the amount in paragraph (a) cannot be less than zero, a company had a positive capital dividend account as a result of disposing of eligible capital property notwithstanding that its capital dividends and capital losses exceeded its capital gains.
Income Tax Technical News, No. 10, 11 July 1997, "Life Insurance Policy Used as Security for Indebtedness"
26 July 1994 External T.I. 9415675 - CAPITAL DIVIDEND ACCOUNT
Where a corporation is the beneficiary of a life insurance policy but is not the policyholder and has, therefore, not paid the premiums in respect of the policy, the adjusted cost basis of the policy to the corporation will be nil, with the result that the full proceeds of the life insurance policy will be added to the corporation's capital dividend account.
15 February 1994 Ruling 9402353 - LIFE INSURANCE - CAPITAL DIVIDEND ACCOUNT
There is no requirement that the shareholders to whom a capital dividend is to be paid must have been shareholders at the time the corporation received the life insurance proceeds out of which the dividend will be paid.
20 October 1993 External T.I. 9323775 F - Capital Account and Life Insurance Proceeds in Trust
In order for life insurance proceeds to be included in the capital dividend account of a corporation, the proceeds must be considered to be received by the corporation. If the amounts are received by a trust, other than a bare trust, and then distributed to the corporation, they are not considered to have been so received. A corporation can be considered to have received the proceeds of a life insurance policy which it owned and on which it paid the premiums where it directed the payments to a third party provided the corporation was the beneficiary under the policy.
20 September 1993 Income Tax Severed Letter 9321275 - Life Annuities
S.245 potentially could apply to a back-to-back insurance strategy which provided for the purchase of a term life insurance policy providing a death benefit equal to the premium paid to acquire a life annuity, if the purpose of the arrangement was to provide an addition to the capital dividend account in circumstances where the death benefit could be considered a return of an investment.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 70 - Subsection 70(5.3) | 50 |
24 July 1992 T.I. 921605 (C.T.O. "Living Benefits and Capital Dividend Account")
An advance payment of part of the sum assured under a policy where the life expectancy of the insured is less than two years due to a medically incurable condition will not qualify as having been received "in consequence of the death of any person" because such phrase refers to amounts received after the death of the insured and not to amounts received in contemplation of her death.
23 March 1992 T.I. (Tax Window, No. 18, p. 22, ¶1824)
Where two personal holding companies each own 50% of the shares of Opco and each holding company is the owner of an insurance policy on the life of the individual shareholder of the other holding company and whose beneficiary is the other holding company, the full amount of the insurance proceeds will be added to the capital dividend account of the other holding company.
3 January 1992 Memorandum (Tax Window, No. 15, p. 8, ¶1682)
The capital dividend account with respect to a dividend paid part-way through the year was not reduced by the bankruptcy prior to that time of a corporation whose shares were held as an investment, because s. 50(1) did not deem the capital loss arising from the bankruptcy to occur until the year-end.
12 November 1991 T.I. (Tax Window, No. 13, p. 4, ¶1592)
Where an individual owns a life insurance policy and pays all the premiums, but a corporation is the beneficiary, the corporation will add the proceeds of the policy to its capital dividend account.
31 May 1990 T.I. (October 1990 Access Letter, ¶1468)
The amount of 1% of a price paid to the vendor of a winning lottery ticket under Lotto-Québec would not be included in the vendor corporation's capital dividend account.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 9 - Exempt Receipts/Business | 24 | |
| Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement | 24 |
31 January 1990 T.I. (June 1990 Access Letter, ¶1266)
In computing the capital dividend account of a corporation following the winding-up of the wholly-owned subsidiary, separate calculations must be made under ss.89(1)(b) and 87(2)(z.1).
9 November 89 T.I. (April 90 Access Letter, ¶1176)
A business investment loss is a capital loss, and therefore will reduce a taxpayer's capital dividend account.
89 C.R. - Q.49
A prior year's capital gains reserve is considered to come into the capital dividend account calculation at the beginning of the year.
IT-66R6 "Capital Dividends"
Articles
Strain, "Estate Planning: Life-Insured Share Redemption Provides Advantages over Outright Buy Back", Taxation of Executive Compensation and Retirement, September 1993, p. 811.
Paragraph (a)
See Also
Gladwin Realty Corporation v. The Queen, 2019 TCC 62, aff'd 2020 FCA 142
The taxpayer, a private real estate corporation, rolled a property under s. 97(2) into a newly-formed LP, with the LP then distributing to the taxpayer an amount approximating its capital gain of roughly $24M realized on closing the sale of the property. Such distribution generated a negative ACB gain to the taxpayer of that rough amount under s. 40(3.1) and an addition to its capital dividend account of roughly $12M (as this occurred before a 2013 amendment that eliminated such additions). The taxpayer recognized a further $24M capital gain at the partnership year end, which increased its CDA by a further $12M to $24M. It then promptly paid a $24M capital dividend to its shareholder. Later in the same taxation year, it was permitted to generate a capital loss of $24M under s. 40(3.12) to offset the s. 40(3.1) capital gain previously recognized by it.
Hogan J confirmed CRA’s application of s. 245(2) to reduce the taxpayer’s CDA by ½ the amount of the s. 40(3.1) capital gain, thereby generating Part III tax unless an s. 184(3) election was made. First, the CDA rule “was adopted to ensure that only one-half of a capital gain would be subject to income tax if the gain was realized indirectly by a private corporation” (para. 42), whereas here there was “over-integration,” i.e., the taxpayer purported “to pay a capital dividend equal to the entire capital gain realized from the sale of the Property” (para. 86).
Second, “the purpose and effect of subsection 40(3.1) are to dissuade taxpayers from extracting from a partnership on a tax-free basis funds in excess of their investment in the partnership” (para. 58) - and s. 40(3.1) “and the alleviating rule in subsection 40(3.12) were not enacted to encourage taxpayers to deliberately create offsetting gains and losses for the purpose of inflating their CDA” (para. 67).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | using the CDA and negative ACB rules to generate “over-integration” was abusive | 594 |
| Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.1) | purpose of s. 40(3.1) is to trigger gain on extraction of excess funds by passive partners | 330 |
| Tax Topics - Income Tax Act - Section 123.3 | no CRA challenge to continuance to BVI to avoid s. 123.3 tax | 96 |
Administrative Policy
22 January 2019 External T.I. 2019-0791631E5 - Calculation of Capital Dividend Account
In Year 1, a corporation paid a capital dividend based on a capital gain realized in that year. Would the realization by it of a capital loss in Year 2 result in an excess amount that engaged Part III tax? CRA responded:
The capital loss realized by Corporation Z in year 2 only affects the calculation of its CDA from that point forward such that the capital dividend paid by it in year 1 is not affected.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 184 - Subsection 184(2) | subsequent capital loss did not generate excessive dividend | 57 |
21 November 2017 CTF Roundtable Q. 4, 2017-0724051C6 - Timing of deemed gain under 55(2)
S. 55(2)(c) deems most dividends that did not arise on a share redemption and to which s. 55(2) applies to be gains “for the year,” without specifying when in the year the deemed gains occurred. In a reversal of the result in 2011-0412131C6 (which dealt with somewhat different statutory wording), CRA has now indicated that a gain under s. 55(2)(c) is deemed to be realized at the time of the payment of the dividend, with the result that there is an addition to the capital dividend account at that time rather than only on completion of the year.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 55 - Subsection 55(2) - Paragraph 55(2)(c) | immediate CDA addition for s. 55(2)(c) dividend | 173 |
S3-F2-C1 - Capital Dividends
S. 55(2) gains
1.31.1 An amount deemed to be a gain under paragraph 55(2)(c) is deemed to be realized on a disposition of a capital property at the time of the payment of the dividend for purposes of calculation of the CDA
Negative ACB gains
1.32 The capital gains and capital losses referred to in ¶1.27 do not include certain capital gains and capital losses that, pursuant to paragraph 40(3.1)(a) and subsection 40(3.12), arise from the deemed disposition of a member’s interest as:
- a limited partner; or
- a specified member of a partnership.
Gifts
1.34 For certain gifts, the entire capital gain is non-taxable. For example, for gifts of certain listed securities to qualified donees, paragraph 38(a.1) deems the taxable amount of a capital gain to be zero so that the non-taxable portion will be the full amount of the capital gain. ...
Flow-through shares
1.35 A special rule applies if the gifted security (or share disposed of in exchange for such security) is a property described in paragraph 38(a.1) that is included in a flow-through share class of property. Applicable to such gifts or dispositions made on or after March 22, 2011, the amount added to the CDA on account of the gifted security or exchanged share will be reduced. The reduction is equal to the taxable portion of a separate amount that is deemed by subsection 40(12) to be a capital gain in respect of the gifted security or exchanged share but which is not, itself, otherwise included in the calculation of the corporation’s CDA.
FAPI
1.39 Capital gains included in the foreign accrual property income of a foreign affiliate of a corporation cannot be added to the corporation’s CDA.
Understated reserves
1.40 ... Payment of a capital dividend during a tax year that is based on a calculation which overstates the actual balance in the CDA, because of an under-estimation of the amount of the reserve to be deducted at the year-end, may give rise to an assessment of Part III tax.
Capital gains reserve
1.41 The reduction to a corporation’s CDA balance in respect of a subparagraph 40(1)(a)(iii) reserve that was deducted at the end of a particular tax year is added back to calculate the CDA balance on the first day of the next tax year. ...
Timing of capital gains from partnership
1.42 Where a private corporation is a member of a partnership that realizes a capital gain, the relevant amounts in respect of the gain that are allocated to the corporate partner will be included in the calculation of its CDA at the end of the fiscal period of the partnership that ends in the corporation’s tax year.
Not affected by s. 34.2
1.43 Pursuant to paragraph 34.2(5)(b), a corporation’s CDA is not affected by any amounts arising from the application of section 34.2. Section 34.2 provides rules that adjust a corporate partner’s income to limit the deferral of tax where the partnership has a fiscal period that differs from the corporation’s tax year. It also provides rules for transitional relief.
1.44 Allowable capital losses forming all or part of a corporation’s net capital losses may not be deductible pursuant to subsection 111(4) because control of the corporation was acquired by a person or group of persons. However, the capital losses from which the allowable capital losses are derived will be included in the calculation of, and reduce Component 1 of the corporation’s CDA.
Excess capital losses not deducted from other components
1.45 ... When a capital loss is realized, the amount of the first component added to the corporation’s CDA is reduced. However, a negative balance in that component is not carried over to the computation of the CDA balance itself. This means that it does not reduce the aggregate amount of the other components included in the corporation’s CDA... .
17 August 2016 Internal T.I. 2016-0639251I7 - Capital Dividend Account and 149(1)(n)
Can an entity exempt under s. 149(1)(n) have and use a capital dividend account (“CDA”)? The Directorate responded:
[A] s. 149(1)(n) entity may qualify to have a CDA if it is a private corporation. … [T]he tax-free amount available to the shareholders of a corporation (including a corporate 149(1)(n) entity), through the CDA, will generally be limited to one half of the capital gain.
However, should it lose its exempt status, it also would lose its CDA under s. 89(1.2) – and the timing of the capital gains arising to it under the s. 149(10) disposition of its property would preclude those gains from being added to the available amount of its CDA.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1.2) | deemed 149(10) gain does not add to CDA before it disapppears under 89(1.2) | 169 |
| Tax Topics - Income Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(n) | can have a CDA while exempt | 92 |
29 November 2016 CTF Roundtable Q. 4, 2016-0671491C6 - 55(2) and Part IV Tax
Taking its RDTOH of $383,333 into account, Opco pays a taxable dividend of $1,000,000 to Holdco (its wholly-owning parent also with a calendar taxation year), so that Opco expects to receive a dividend refund of $383,333. Holdco then pays a $1,000,000 taxable dividend to its individual shareholder. Consequently, Holdco will pay Part IV tax of $383,333 but will be eligible for an offsetting dividend refund. Also assume no relevant safe income and s. 55(2.1)(b) applies to the dividend received by Holdco.
In Holdco’s tax return, it would report a $1,000,000 capital gain and no Part IV tax on the dividend, and Holdco would add $153,333 (30 2/3% of $500,000) to its RDTOH account. Therefore, Holdco elects to pay a capital dividend of $500,000 out of the $1,000,000 dividend and treats only the balance of $500,000 as a taxable dividend, which is sufficient to generate a full refund of the $153,333 of RDTOH. Does this work?
CRA responded by indicating that, consistently with Ottawa Air Cargo, the application of s. 55(2) depended on the actual payment of the Part IV tax, and the actual receipt of the refund of the Part IV tax. Accordingly, Holdco should file both an original return (reporting the Part IV tax owing, and its refund) and an amended return (adjusting for the application of s. 55(2) to the dividend received by Holdco). However, the amount of the taxable dividend paid by Holdco to the individual shareholder would not change.
Holdco’s s. 83(2) election would be invalid, as it would retroactively access the application of s. 55(2) to the dividend received from Opco. Consequently, the $500,000 CDA arising from s. 55(2)’s application will be available only for CDA elections made on future dividends.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 55 - Subsection 55(2) | repeal of the s. 55(2) exemption, for dividends for which the Part IV tax is refunded on on-payment to an individual shareholder, busts integration | 93 |
5 October 2012 APFF Roundtable Q. 8, 2012-0454161C6 F - Computation of CDA and Acquisition of Control
Where Mr. A, who owns 50% of the shares of a CCPC ("Holdco") having net capital losses of $200,000, purchases the other 50% shareholding of Mr. B, thereby giving rise to an acquisition of control of Holdco, such net capital losses will still be taken into account in computing the CDA of Holdco following the acquisition of control (Tax Interpretations Translation):
[T]he fact that Holdco's net capital losses are not deductible in computing its taxable income for a taxation year ending after the acquisition of control, by virtue of paragraph 111(4)(a), has no impact on the calculation of the CDA of Holdco. In fact, the calculation of a corporation's CDA is a cumulative calculation and no particular adjustment is provided for in a situation similar to the one you submitted.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | purchase of shares of cash-rich company could be part of abusive surplus strip | 76 |
28 March 2012 External T.I. 2011-0412541E5 F - Compte de dividendes en capital
A deemed capital gain arising under s. 80(12) will result in an addition to the corporation's capital dividend account under (a)(i)(A) (with the taxable portion being deducted under (a)(i)(B).)
27 June 2011 External T.I. 2009-0350501E5 F - Gains et pertes sur change étranger
A Canadian corporation acquires capital property at a cost of U.S.$90,000 and pays the purchase price 30 days later after the exchange rate has moved from Cdn.$1.10 to Cdn.$1.11. After concluding that this resulted in a capital loss of $900 under s. 39(2), CRA stated:
As stated in 2007-0234691I7, the capital gain or loss arising from the application of subsection 39(2) can only be determined at the end of the taxpayer's taxation year and only after considering all foreign exchange gains/losses realized/incurred in that taxation year. Consequently, the capital gains or losses resulting from subsection 39(2) will only affect the balance of the capital dividend account at the end of the taxpayer's taxation year.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 39 - Subsection 39(2) | s. 39(2) gain or loss on USD-denominated purchase arises between acquisition and payment date | 221 |
17 September 2009 External T.I. 2009-0310251E5 F - Interaction between sections 89 and 55
S. 55(2) applied to the redemption by Opco of shares held by Holdco, given that the resulting s. 84(3) deemed dividend exceeded the safe income on hand attributable to the redeemed shares ("Safe Income"). Holdco made an s. 55(5)(f) designation. (a) When is the non-taxable portion of the s. 55(2) capital gain included in computing Holdco's capital dividend account ("CDA")? What if (b) no s. 55(5)(f) designation is made by Holdco, or (c) it is made late? CRA responded:
[(a)] [T]he non-taxable portion of the capital gain resulting from the redemption of the shares of the capital stock of Opco would be included in Holdco's CDC at the time of the disposition of such shares of the capital stock of Opco, i.e., at the time of their redemption.
… [(b)] [T[he total of the dividend referred to in subsection 84(3) would technically be deemed to be proceeds of disposition pursuant to paragraph 55(2)(b). That said, the inclusion in Holdco's CDA of the non-taxable portion of the capital gain resulting from the redemption of the shares of the capital stock of Opco would continue to occur on the disposition of those shares.
… [(c)] If Holdco made a late designation pursuant to paragraph 55(5)(f) and that designation was accepted …, such designation should be taken into account for the purposes of subsection 55(2). While such a designation would affect the amount to be included in Holdco's CDA as a result of the redemption of the Opco shares, it would not affect the timing of such inclusion. Thus, the inclusion in Holdco's CDA of the non-taxable portion of the capital gain resulting from the redemption of the Opco shares would continue to occur at the time of the disposition of the Opco shares.
14 March 2003 External T.I. 2003-0001385 F - Capital Dividend Account
Parentco, which had a January 31 year end, sold one of its subsidiaries (Subco1) at a capital loss on January 14, 2000, and amalgamated with its other subsidiary (Subco2) on April 17, 2000. On April 18, 2000, one of its 50% shareholders sold its shares to the other shareholder, resulting in an acquisition of control. Amalco then made an s. 111(4)(e) designation to step up land and building.
CCRA indicated that the definition of capital dividend account, para. (a) did not contain an adjustment similar to the adjustment in s. 111(1.1) for net capital loss, so that ¾ of the capital loss realized on January 14 was deducted from the Parentco (and the Amalco) CDA and 2/3 of the capital gain realized under s. 111(4)(e) was added to its CDA.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 256 - Subsection 256(9) | amalgamation and acquisition of control on successive days created 1-day short taxation year | 166 |
6 January 2003 External T.I. 2002-0173405 F - Capital Dividend Account
CCRA provided an overview of the CDA computation in the context of the changes in the inclusion rates from ¾ to 2/3 to ½ (including the corporation receiving a capital gains distribution from a trust) and then dealt with a specific numerical example.
Subparagraph (a)(i)
Administrative Policy
27 November 2018 CTF Roundtable Q. 2, 2018-0780071C6 - Impact of 55(2) deeming rules
CRA will ensure that the taxpayer will not be penalized in the capital dividend account calculation where a stock dividend or paid-up capital increase was previously subject to s. 55(2). Thus, CRA will restrict the exclusion of 53(1)(b)(ii), and the similar provision found in s. 52(3)(a), in the calculation of the CDA, to situations where s. 55(2) did not apply to the stock dividend or the paid-up capital increase.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 52 - Subsection 52(2) | property dividended has cost equal to FMV where subject to s. 55(2) | 104 |
| Tax Topics - Income Tax Act - Section 52 - Subsection 52(3) | cost under s. 52(3) for stock dividend amount to which s. 55(2) applied | 69 |
| Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(b) - Subparagraph 53(1)(b)(ii) | no basis reduction for s. 84(1) dividend to which s. 55(2) applied | 161 |
| Tax Topics - Income Tax Act - Section 112 - Subsection 112(3) - Paragraph 112(3)(b) - Subparagraph 112(3)(b)(i) | stop-loss rule does not apply to the extent of the application of s. 55(2) | 92 |
Clause (a)(i)(C)
Administrative Policy
S3-F2-C1 - Capital Dividends
Exclusion for gains of CCPC that accrued under exempt or NR-controlled status
1.37 For dispositions occurring after November 26, 1987, another amount is excluded from Component 1. That amount is the portion of capital gains or losses on property that can reasonably be considered to have accrued during any period that it, or property for which it was substituted, was held by a corporation that was:
- controlled, directly or indirectly in any manner whatever, by one or more non-resident persons if, after November 26, 1987, the property became the property of a CCPC, otherwise than because of a change in the residence of one or more of the corporation’s shareholders; or
- exempt from tax under Part I if, after November 26, 1987, the property became the property of a private corporation that was not exempt from tax under Part I.
As a result, these exclusions apply where the status of the corporation changes after November 26, 1987. The exclusions also apply if the property is acquired after November 26, 1987 on a rollover basis by the CCPC or the private corporation that was not exempt from tax, as the case may be.
Clause (a)(i)A)
Administrative Policy
21 June 2017 External T.I. 2016-0678361E5 F - Capital Dividend Account
ACo and BCo is each a private corporation holding a 49.99% limited partnership interest in Holdings LP and having a calendar year end. On December 31 of a particular year, Holdings LP had a “negative” adjusted cost base of its interest in Realty LP of $300,000. The correspondent, after noting that (a)(i)(A) of the capital dividend account definition excludes a capital gain under paragraph 40(3.1)(a), suggested that ACo’s share of the “negative” ACB gain realized by Holdings LP could be included in ACo’s CDA, as this gain would not come from the disposition of ACo's interest in Holdings LP (and there was no deemed disposition of such interest) but, rather, from an allocation of income.
In finding that there would be no addition to ACo’s CDA, CRA stated:
[U]nder paragraph 96(1)(f), the amount of the income of the partnership for a taxation year from any source is the partner's income from that source to the extent of its share thereof. This income will generally retain its nature and characteristics. We are therefore of the view that a deemed capital gain under subsection 40(3.1) that is allocated by a partnership to one of its corporate partners would be subject to the exclusion stated in clause (a)(i)(A) of the definition of capital dividend account under subsection 89(1).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) | a negative ACB gain retains its character when allocated | 85 |
16 November 2011 External T.I. 2011-0423861E5 F - paragraph 53(1)b)
Holdco, whose common shares of Opco have a nominal adjusted cost base ("ACB") and paid-up capital ("PUC"), a fair market value ("FMV") of $2 million and safe income on hand ("SIOH") attributable to those shares of $900,000, increases the PUC of those shares by $1 million, and transfers those common shares (or to be more precise, new common shares issued in replacement therefor on the PUC increase) to Opco for cancellation in consideration for the issuance by Opco of (i) preference shares of Opco having an FMV, PUC and ACB (determined under s. 85(1)(g)) of $1 million; and (ii) common shares having a FMV of $1 million and nominal PUC and ACB.
If s. 55(2) did not apply to the s. 84(1) dividend, then the ACB of the common shares of Opco held by Holdco following that PUC increase would be determined under s. 53(1)(b) as the excess of the s. 84(1) deemed dividend of $1 million minus $100,000, being the portion of that dividend that did not come out of SIOH - i.e., $900,000.
On the other hand, if s. 55(2) applied to the s. 84(1) dividend, the ACB of those common shares would be the excess of the s. 84(1) deemed dividend received by Holdco (which, by virtue of s. 55(2) would be limited to the SIOH of $900,000) over the nil portion of that deemed dividend that did not come out of SIOH hand - i.e., also $900,000.
Accordingly, in both scenarios, Holdco would realize a $100,000 capital gain on the "dirty s. 85" transfer of the common shares, i.e., the excess of the agreed amount of $1 million over the ACB of $900,000. No amount would be added to the proceeds of disposition of the common shares because of the exclusion under s. 55(2)(b); and CRA would not apply s. 55(2)(c).
Respecting the application of s. (a)(i)(A) of the CDA definition, CRA stated:
As indicated in Technical Interpretation No. 2011-0421141E5, in situations where it is determined that subsection 55(2) would not apply to a transaction or series of transactions or events, according to the proposed changes to the CDA definition, it would be necessary to recalculate the capital gain for the purposes of calculating the CDA as if the decrease in ACB provided for in subparagraph 53(1)(b)(ii) (as proposed) had not been effected. This would have the consequence that for the purpose of calculating the CDA, the capital gain added under clause 89(1)(a)(i)(A) of the CDA definition would be less than the capital gain calculated for the purposes of section 39. Thus, in [the dirty s. 85 exchange in[ Step 14 and in computing the CDA of Holdco, the proceeds of disposition to Holdco of the 2,000,000 common shares held in the capital stock of Opco would be $1,000,000 by virtue of paragraph 85(1)(a), and the ACB of those shares would also be $1,000,000 by reason of clause 89(1)(a)(i)(A) and paragraph 53(1)(b) (without taking into account subparagraph 53(1)(b)(ii)) (as proposed). Accordingly, no capital gain would be realized for the purposes of clause 89(1)(a)(i)(A) in such a context.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(b) | example of application of s. 53(1)(b) on dirty s. 85 exchange of common shares with partial SIOH for high PUC/ACB prefs and low PUC/ACB common shares | 295 |
14 October 2011 External T.I. 2011-0421141E5 F - Computation of capital dividend account
A dividend computed under s. 84(1) is deemed not to be a dividend by s. 55(2)(a), and the share is disposed of at a gain. Is the addition of "computed without reference to subparagraphs 52(3)(a)(ii) and 53(1)(b)(ii)" to (a)(i)(A) of the CDA definition applicable?
Given that subparagraph 53(1)(b)(ii), as proposed on July 16, 2010, refers to "the portion of the total determined under subparagraph (i) that relates to dividends" and since the amount of the dividend deemed not to be a dividend under paragraph 55(2)(a) is not part of the total determined under subparagraph 53(1)(b)(i), that amount would also not be affected by subparagraph 53(1)(b)(ii). Thus, the proposed amendment to the CDA definition in subsection 89(1) to add the expression "computed without reference to subparagraphs 52(3)(a)(ii) and 53(1)(b)(ii)”, would have no impact when calculating the CDA of a corporation in such a situation.
7 October 2011 APFF Roundtable Q. 29, 2011-0412131C6 F - Subsection 55(2) and Capital Dividend Account
If in the year prior to the sale of Opco by Holdco, Opco pays a dividend to Holdco which is subject to s. 55(2), s. 55(2)(b) generally would apply to trigger a capital gain and, thus, an addition to the capital dividend account, at the time of the disposition of the Opco shares. However, if s. 55(2)(c) instead applied, there would be deemed to be a capital gain of the corporation for the year in which the dividend was received, so that the resulting addition to the capital dividend account could only be distributed in the following years.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 55 - Subsection 55(2) - Paragraph 55(2)(c) | dividend paid in contemplation of subsequent arm’s length share sale is part of proceeds of that sale | 207 |
Articles
Rick McLean, Jeff Oldewening, Jonas Lau, "Capital Gains Stripping and Surplus Stripping", 2017 Annual CTF Conference draft paper
Use of high-PUC, low ACB shares to create CDA (pp. 4-5)
[T]he new rules denied the creation of ACB in shares issued on a stock dividend or pursuant to a PUC bump unless the taxable dividend was paid out of safe income on hand of the dividend payer. [fn 30: Subclause 52(3)(a)(ii)(A)(II) for a stock dividend, and subparagraph 53(1)(b)(ii) for a PUC bump.] …
The ACB denial rules can cause a parent's shares of its subsidiary to have mismatched tax attributes. For a stock dividend or a PUC bump to which the ACB denial rules apply, the shares of the subsidiary can have higher PUC than ACB. Where the redemption price of the shares is equal to their PUC, the parent may cause such shares of its subsidiary to be redeemed in order to realize a capital gain. Alternatively, the parent might dispose of those shares of the subsidiary in another manner, whether to a third party or pursuant to an internal reorganization, in order to realize the capital gain. In either case, on any disposition of its high-PUC, low-ACB shares of the subsidiary, the parent may increase its CDA by virtue of its realized capital gain. This enables a "mixing-and-matching" distribution of the parent's pre-existing safe income on hand from one source, such as its active business income, to an individual shareholder as a capital dividend, using its CDA created from a capital gain realized on any disposition of its high-PUC, low-ACB shares of the subsidiary.
Purpose of CDA penalty rule in s. 89(1) – CDA – (a)(i)(A) (pp. 5-6)
In recognition that the ACB denial rules created this surplus stripping opportunity,…[t]he CDA penalty denies the creation of CDA in respect of the portion of a realized capital gain that is preserved by the ACB denial rules….
[I]t is possible to argue that the CDA penalty recalculates ACB for purposes of CDA only in order to frustrate more modern surplus stripping. Where the ACB denial rules apply, the subsidiary's safe income on hand is converted into ACB, reducing the parent's built-in capital gain in its shares of the subsidiary. The parent may dispose of such shares of the subsidiary in order to realize a capital gain that was preserved by the ACB denial rules. The tax-free portion of this gain is included in the parent's CDA. As a result, the parent may make a "mixing-and-matching" distribution of its own pre-existing safe income on hand to an individual shareholder as a tax-free capital dividend.
Example illustrating punitive effect of CDA penalty rule (p. 6)
[A]n individual owns all of the shares of a private corporation resident in Canada (“Holdco”). Holdco owns all of the shares of another Canadian-resident corporation ("Opco") having a fair market value of $100, PUC of nil, and ACB of nil. Thus, Holdco's built-in capital gain in its Opco shares is $100. Assume that Opco's safe income on hand attributable to its shares held by Holdco is $25. Imagine that Opco miscalculated its safe income on hand attributable to its shares held by Holdco. Thus, Opco undertakes a PUC bump of $100, giving rise to a deemed dividend of $100.
On the PUC bump, the ACB to Holdco of its Opco shares does not increase by the full amount of the deemed dividend of $100. Rather, Holdco's ACB in the Opco shares increases only to the extent that the PUC bump is paid out of safe income on hand of $25. This more modest increase in ACB reduces Holdco's built-in capital gain in its Opco shares to $75, preserving the portion of the capital gain that was not attributable to safe income on hand….
[S]olely for calculating Holdco’s CDA, the ACB to Holdco of its Opco shares is increased by the full amount of the deemed dividend of $100. Therefore, any subsequent disposition of the Opco shares by Holdco does not give rise to a capital gain for purposes of computing Holdco's CDA. This is a punitive measure; on such a subsequent disposition, the portion of Holdco's realized capital gain that was preserved by the ACB denial rules cannot increase its CDA.
Avoidance of CDA penalty by setting PUC of stock dividend shares below estimated safe income (pp. 18-19)
[C]onsider a high-low stock dividend that is paid on common shares of a dividend payer that are held by the dividend recipient, consisting of preferred shares with a high redemption price (and thus fair market value) of $100, but a low stated capital (and thus PUC) of $40. The dividend payer's safe income on hand attributable to its common shares on which the stock dividend is received is $70….
By setting PUC of the issued shares below estimated safe income on hand, the CDA penalty can be avoided regardless of whether subsection 55(2) recharacterization is respected when determining the dividend "amount". In this example, subsection 248(1) sets the "amount" of the high-low stock dividend at the PUC of the preferred shares of $40. Subsection 55(2.2) adjusts this "amount" of the high-low stock dividend to $100 for the stipulated purposes in section 55. Subsection 55(2.3) bifurcates this $100 adjusted dividend "amount" into a safe income dividend of $70, and non-safe income dividend of $30, solely for purposes of section 55.
The methodology to compute the ACB to the dividend recipient of the preferred shares of the dividend payer issued on the stock dividend turns on whether the dividend "amount" is $40 as computed under subsection 248(1), or only $10 comprising the portion of that same dividend "amount" that remains after recharacterization under subsection 55(2). In each case, the ACB to the dividend recipient of the preferred shares is $100, and the CDA penalty does not apply. …
A high-low stock dividend having a redemption price (and thus fair market value) above safe income on hand, but stated capital (and thus PUC) below safe income on hand, is an optimal way to crystallize safe income on hand. This strategy avoids uncertainty concerning the dividend "amount", and preserves integration by avoiding the CDA penalty. The circumvention of the CDA penalty is not abusive. The reason is that, from a tax policy perspective, the CDA penalty is no longer needed to deter surplus stripping of the dividend payer's safe income on hand after the 2015 amendments.
Subparagraph (a)(i.1)
Administrative Policy
20 June 2023 STEP Roundtable Q. 12, 2023-0959591C6 - Corporate Beneficiary and CDA
An inter vivos Canadian resident trust pays an amount equal to its net taxable capital gain for the year to a Canadian private corporation that is a beneficiary and designates that amount pursuant to s. 104(21). What amount is added to the capital dividend account (CDA) of the corporation if the non-taxable portion of the trust’s capital gains is paid out to other beneficiaries – and when does the addition occur? What if the entire capital gain is paid to that corporation?
CRA indicated that, by virtue of a valid s. 104(21) designation, the entire amount distributed would be treated as a taxable capital gain of the Canadian corporation from the disposition of capital property. However, no amount would be added to the corporation’s capital dividend account, based on the wording of s. (a)(i.1) of the CDA definition.
Where the entire amount of the trust capital gains was distributed to the corporate beneficiary, again an s. 104(21) designation could be made. The ½ distributed that was the non-taxable portion of the trust’s capital gains, would be added to the corporation’s CDA, net of any applicable amount of the corporation’s allowable capital losses.
The addition to the corporation’s capital dividend account would be considered to occur at the end of the taxation year of the trust in which the trust made the distribution to the corporation, given that the s. 104(21) designation cannot be made before the end of the trust’s taxation year.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(21) | s. 104(21) designation can be made re distributing the taxable half of a trust capital gain to a corporate beneficiary – who receives no CDA addition | 172 |
Subparagraph (a)(ii)
Administrative Policy
23 July 2007 Internal T.I. 2007-0234691I7 F - Foreign Exchange Gains/Losses and CDA
CRA indicated that since a capital loss was not recognized under s. 39(2) until the end of the taxation year, the deduction under the CDA account did not occur until that time.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 39 - Subsection 39(2) | FX losses sustained on the maturity of commercial paper deemed under s. 39(2) to be realized at year end, so that CDA deduction deferred until then | 187 |
28 September 2006 Internal T.I. 2006-0202901I7 F - Subsection 80(4) - Impact on the CDA
In finding that the application of a net capital loss under s. 80(4) does not reduce the deduction for the non-taxable portion of realized capital losses under para. (a)(ii) of the CDA definition, the Directorate indicated that s. 80(4)(b) reduces the net capital losses of a corporation where a commercial obligation issued by a debtor is settled and a forgiven amount results from such settlement of debt, and has no effect on the amount of capital losses and allowable capital losses sustained by a taxpayer, whereas s. (a)(ii) of the CDA definition sustained by the taxpayer in the relevant period (irrespective of how they have been applied).
Paragraph (b)
Administrative Policy
30 August 2017 External T.I. 2017-0718311E5 F - Capital dividend account
CRA indicated that a late but valid capital dividend election retroactively validates the dividend so that the recipient of the dividend thereby has an addition to its capital dividend account at the time of the receipt of the dividend.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 83 - Subsection 83(3) | a late s. 83(3) election causes a retroactive increase to the CDA of the corporate recipient of the dividend | 213 |
S3-F2-C1 - Capital Dividends
Effect of excessive 83(2) election
1.47 ... [E]ven an excessive dividend is included in the recipient corporation’s CDA. However, if the payor corporation makes an election under subsection 184(3) in respect of the excessive dividend, the amount added to the recipient corporation’s CDA will be limited to the portion of the dividend that continues to be excluded from the recipient corporation’s income under subsection 83(2).
Timing of partner's inclusion of capital dividend
1.49 ... [I]f the partnership agreement provides that a particular corporate partner is entitled to a share of a capital dividend at the time the dividend is received by the partnership, the partner would add its share of the dividend to its CDA at that time.
25 August 2011 External T.I. 2011-0417511E5 F - CDA and Excessive dividend
A private corporation elected under s. 83(2) on a dividend amount in excess of its capital dividend account (CDA), and it paid Part III tax under s. 184(2). Does that excess affect the subsequent CDA computation? CRA responded:
[S]ubsection 83(2) ensures that the portion of the dividend covered by an election pursuant to subsection 83(2) that exceeds the CDA immediately before the time the dividend becomes payable, is not deemed to be a capital dividend. … [T]he excess portion … would not reduce the subsequently-computed CDA of the corporation that paid the dividend.
Furthermore, subject to an election under subsection 184(3), paragraph 83(2)(b) results in no part of a dividend that is the subject of an election made under subsection 83(2) being included in computing the income of any shareholder. … [A]ny corporate shareholder would add to its CDA the entire dividend designated under the subsection 83(2) election (including the excess of the dividend on the capital dividend), provided that the dividend payor has not made an election pursuant to subsection 184(3).
14 June 2007 Internal T.I. 2007-0229311I7 F - Capital Dividend Account
Subco declared a dividend payable to its parent (Parentco) which, in turn, declared a corresponding dividend to its individual shareholder, with a s. 83(2) election being made in both cases. When, on audit, CRA noted that the dividends declared were not recorded in the books of account of Parentco and Subco and that there were not cash payments, the accountant recorded book entries for Subco and Parentco showing amounts due for the dividends. In finding that this was insufficient to give rise to a capital dividend “received,” so that there had been no addition to the capital dividend account of Parentco, the Directorate stated:
[T]he mere making of the accounting entries … does not in itself constitute the payment of a dividend … by either Subco or Parentco.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Payment & Receipt | making accounting entries does not constitute payment of a dividend | 130 |
| Tax Topics - Income Tax Act - Section 184 - Subsection 184(3) | 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 | 135 |
| Tax Topics - General Concepts - Effective Date | a declared dividend cannot be revoked | 158 |
Paragraph (c.1)
See Also
Non Corp Holdings Corp. v. Canada (Attorney General), 2016 ONSC 2737
Following the sale of a business giving rise to a “capital gain” (likely, goodwill proceeds), the dividend of the targeted capital dividend amount was paid on the first day of the following year, but the resolution declaring the dividend was dated the last day of the current year. Dunphy J granted a rectrification order to change the dividend declaration date to the following payment date (as required by CRA in order to reverse the Part III tax).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Rectification & Rescission | date of capital dividend declaration rectified to eliminate Part III tax | 192 |
Administrative Policy
5 December 2001 Internal T.I. 2001-0089247 F - CDC - Immobilisation Admissible
The Directorate confirmed that since any inclusion under s. 14(1) can only be determined at the end of a taxation year, under the amended rules a gain from the disposition of an eligible capital property was to be added to the capital dividend account only where the taxation year of disposition had been completed. The Directorate also provided a numerical example in response to a TSO view that an eligible capital expenditure was to be deducted twice in the CDA computation.
Paragraph (c.2)
Administrative Policy
13 September 2004 Internal T.I. 2004-0080041I7 F - Compte de dividendes en capital
A corporation which has a 50% interest in a general partnership (the "SENC") which sold a milk quota, was required to include an amount in computing its income from its farming business pursuant to s. 14(1)(a),which represented the recapture of the deductions claimed pursuant to s. 20(1)(b) by the SENC in prior years, and was also required to include an amount pursuant to s. 14(1)(b). which represented its gain on the sale of the milk quota. The Directorate stated:
[T]he corporation may include in its CDA 50%, or its share, of the amount computed by the SENC pursuant to paragraph 14(1)(b) for the taxation year of the corporation in which the taxation year of the SENC ends. For example, if the SENC had a December 31 taxation year and the corporation had a June 30 taxation year, the corporation could include that share in its CDA on December 31.
Paragraph (d)
Administrative Policy
8 July 2020 CALU Roundtable Q. 2, 2020-0842141C6 - Return of premiums on death & CDA
A private corporation is the owner and beneficiary of an exempt life insurance policy (with an adjusted cost basis of $90,000) on the life of a shareholder, who dies from, say, suicide or skydiving, which does not void the policy, but instead results in the insurer repaying all premiums ($100,000). Is there a CDA addition of $10,000 under para. (d) respecting the receipt of “proceeds of a life insurance policy... of which the corporation was... a beneficiary" received as a “consequence of the death of any person." Also, pursuant to para. (j) of s. 148(9) - “disposition,” is there no disposition in relation to an interest in a life insurance policy? CRA responded:
A disposition of an interest in a life insurance policy is defined in subsection 148(9) of the Act and specifically excludes a payment made under an exempt life insurance policy as a consequence of the death of a person whose life was insured under the policy. …
Where proceeds of a life insurance policy are received by a corporation as a beneficiary under an exempt life insurance policy in consequence of death of any person, the proceeds would not, in our view, generally be received as the result of a disposition in relation to an interest in a life insurance policy under subsection 148(9) of the Act. Furthermore, pursuant to the definition of CDA in subsection 89(1) of the Act, the amount by which such proceeds exceed the amounts described in subparagraphs (d)(iii) to (d)(vi) of the CDA definition would be included in the corporation’s CDA.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Disposition - Paragraph (j) | a refund of premiums on death under a life insurance policy does not entail its disposition | 122 |
2016 Ruling 2015-0624611R3 - Capital Dividend Account
Background
A life insurance policy (the “Policy”) was issued to B, and subsequently transferred by him to Canco 1, so that Canco 1 became the beneficiary. Following his death and incorrect advice that the Policy had previously been cancelled, his estate sold Canco 1 to a third party (Canco 2). Following the two corporations’ amalgamation to form Amalco, the insurer issued a cheque to Canco 1, which was deposited by B’s widow (M) in the name of Canco 1.
Proposed transactions
Amalco will declare and pay to its Class J shareholders a dividend out of its capital dividend account, equal to the amount of the insurance proceeds received on the Policy, with the board electing under s. 83(2) on the full dividend amount. Those shareholders will then pay the proceeds, net of Amalco’s transactions costs, to M.
Rulings
Pursuant to s. (d)(ii) of “capital dividend account,” the Policy proceeds received by Amalco that exceed the Policy ACB to Canco 1 will be included in Amalco’s CDA, and s. 83(2.1) will not apply to the dividend.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 83 - Subsection 83(2.1) | transactions to rectify an overlooked life insurance policy of an amalgamated target | 154 |
S3-F2-C1 - Capital Dividends
Reductions under (d)(v) to CDA addition on death
1.60.3 The third and fourth amounts, described in subparagraphs (d)(v) and (vi) of the definition of CDA, apply where all of the following conditions are met:
- the proceeds of the particular life insurance policy were received in consequence of the death of a person after March 21, 2016,
- after 1999 but before March 22, 2016, an interest in the policy was disposed of by a policyholder that was not a taxable Canadian corporation, and
- subsection 148(7) applied to the disposition (the interest was disposed of by way of a gift, by distribution from a corporation or by operation of law only to any person, or in any manner whatever to any person with whom the policyholder was not dealing at arm's length).
1.60.4 Where all of the conditions in ¶1.60.3 are met, the amount otherwise added to the CDA of a corporation in consequence of a person’s death is reduced under subparagraph (d)(v). Generally, the reduction under clause (d)(v)(A) is the amount by which the fair market value of the consideration given in respect of the disposition of the policy exceeded the greater of the value of the interest in the policy (generally, the cash surrender value) and the adjusted cost basis of the policy to the policyholder immediately before the disposition. Adjustments to the amount of the reduction under subparagraph (d)(v) may be required by subclause (d)(v)(A)(II) and clause (d)(v)(B), together with paragraphs 148(7)(c) and (f), where the paid-up capital of a corporation was increased in connection with any such disposition, depending on whether any portion of that increase was extracted before March 22, 2016.
1.60.5 Where all of the conditions in ¶1.60.3 are met, another reduction to the CDA may be required by subparagraph (d)(vi) where, generally, the adjusted cost basis of the interest in the policy to the policyholder immediately before the disposition exceeded the value of the interest in the policy at the time of the disposition.
Deduction of ACB
1.65 ... [T]he amount added to a corporation’s CDA in respect of the receipt of life insurance proceeds as a result of the death of a person on or after March 22, 2016 will be limited to the amount by which the proceeds exceed the adjusted cost basis of a policyholder’s interest in the policy, regardless of whether the particular corporation is the policyholder. ...
Addition of full or net death benefit
1.69 Where a death benefit is paid pursuant to a creditor’s group life insurance policy, the CRA will permit the full amount of the death benefit (as opposed to the net proceeds) to be added to the debtor’s CDA provided the policy is a term and non-participating policy with no cash surrender value, designed to pay the outstanding balance of the debtor’s debt upon death of the life insured.
1.70 Where a death benefit is paid pursuant to a life insurance policy owned by the debtor as policyholder, only the net proceeds may be added to the debtor’s CDA.
Calculation of distributable amount
1.77...
In year 1 Corporation Z realizes a capital gain of $200,000 , of which $100,000 represents the non-taxable portion. Later in that year the corporation pays a dividend of $100,000 from the CDA.
In year 2 Corporation Z realizes a capital loss of $100,000 of which $50,000 represents the non-deductible portion.
In year 3 Corporation Z receives net proceeds of a life insurance policy in the amount of $100,000 .
The amount that Corporation Z could pay from the CDA immediately after receipt of the life insurance proceeds would be calculated as follows:
- Component 1 adds $50,000 to the balance, being the non-taxable portion of the capital gain realized in year 1 minus the non-deductible portion of a capital loss in year 2 ($100,000 - $50,000);
- Component 4 adds $100,000 to the balance, being the net life insurance proceeds realized in year 3; and
- Component 6 reduces the balance by $100,000, being the capital dividends paid in year 1.
As a result, Corporation Z’s CDA balance is $50,000.
19 November 2009 External T.I. 2007-0257251E5 F - Assurance-vie
For the purpose of calculating its capital dividend account, is a corporation that is a beneficiary of a life insurance policy required to take into account the adjusted cost base of that policy to the other corporation that owns the policy? CRA responded:
The calculation of the adjusted cost basis of a life insurance policy is performed only for the policyholder. In this situation, the proceeds of a life insurance policy that are included in paragraph (d) of the capital dividend account of the corporation that is the beneficiary of the policy in subsection 89(1) are not reduced by the adjusted cost basis of the policy that was held by another corporation before the death of the insured.
CRA went on to state:
[S]ubsection 246(1) could apply on a case-by-case basis in a situation where the parent corporation that is the holder of a life insurance policy designates a subsidiary as the beneficiary.
…[T]he series of transactions described in your letter appear to be for the purpose of obtaining tax benefits and could be considered abusive for the purposes of subsection 245(4).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Disposition - Paragraph (d) | disposition by operation of law if there is a new contract | 162 |
| Tax Topics - Income Tax Act - Section 148 - Subsection 148(10) - Paragraph 148(10)(d) | designation of a different beneficiary does not entail a disposition | 132 |
| Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) | s. 15(1) benefit where sub is policyholder and premium payer and parent is beneficiary – but not for reverse | 223 |
8 October 2004 APFF Roundtable Q. 5, 2004-0089141C6 F - Compte de dividendes en capital
A corporate owner and beneficiary of a life insurance policy receives a death benefit in the amount of $850,000, less a policy loan of $150,000 ($1,000,000 - $150,000) in accordance with the terms of the life insurance policy. After finding that the ACB immediately before death, was $50,000 ($200,000 - $150,000), CRA stated:
In general, where the terms of a life insurance policy provide that following the death of the insured, the beneficiary is entitled to receive as a death benefit an amount that is obtained after deducting the policy loan on death, we will consider the net amount received to be the proceeds of a life insurance policy for CDA purposes.
Consequently … the amount to be included in the CDA will be $800,000, which is the proceeds of the life insurance policy ($850,000) received by the corporation as a result of the insured's death less the ACB of that policy to the corporation ($50,000) immediately before death.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Adjusted Cost Basis - Element E | ACB of policy immediately before death reduced by policy loan | 135 |
5 November 2002 External T.I. 2002-0160815 F - CDC HYPOTHEQUE
In 2002-0122944 F, CCRA indicated that the CDA of a corporation for purposes of an s. 83(2) election made after July 8, 2002 could include the amount of a life insurance policy paid to a creditor by virtue of its security interest. CCRA now confirmed that this policy applied to amounts so paid to such a creditor before the July 8, 2002 date of such technical interpretation.
5 November 2002 External T.I. 2002-0161695 F - CDC HYPOTHEQUE
In 2002-0122944 F, CCRA indicated that the CDA of a corporation for purposes of an s. 83(2) election made after July 8, 2002 could include the amount of a life insurance policy paid to a creditor by virtue of its security interest. In finding that the creditor (receiving the life insurance proceeds pursuant to the terms of a hypothec) would not enjoy any addition to its capital dividend account pursuant to s. (d)(ii) of the definition, CCRA stated:
[T]he creditor’s rights regarding the hypothec are collection rights conferred by the hypothec over the policyholder's entitlement against the insurer. In addition, the hypothecary creditor receives the life insurance proceeds as the legal representative of the policyholder debtor and retains the amount in payment of the policyholder debtor's debt. Consequently … the hypothecary creditor will not be able to include in the calculation of its capital dividend account the proceeds of a life insurance policy that it has received in payment of the debtor policyholder's debt because such proceeds are received only by the policyholder.
12 August 2002 External T.I. 2002-0150095 F - Capital Dividend Account
Opco received a lump sum in settlement of its action against an insurance company for its refusal to pay a death benefit to Opco as a result of the death of the insured being from his suicide. CCRA stated:
[W]here a payment is received by a corporation as damages pursuant to an out-of-court settlement and does not represent a death benefit paid pursuant to a corporation's rights under a life insurance policy, the payment cannot be included in computing the corporation's CDA under paragraph (d) of the definition of CDA … .
Subparagraph (d)(ii)
Administrative Policy
8 July 2020 CALU Roundtable Q. 3, 2020-0842151C6 - Insurance Proceeds & CDA
A universal life (UL) policy (referred to as “face amount plus fund value”) purchased by Opco as an exempt policy upon the life of its shareholder provides for the payment of a death benefit equal to the fund value of the policy (being the accumulated balance of the investment accounts within the policy at the time of the death of the life insured) plus the face amount. Following the shareholder’s death, the insurer pays Opco the face amount of $200,000 plus the fund value of $20,000. Would the “proceeds of a life insurance policy” to Opco for purposes of s. (d)(ii) of the capital dividend account definition equal to the full $220,000 death benefit received by Opco? CRA responded:
In the fact pattern described above, the particular payment made by the insurer to Opco was for two amounts. The first was the face amount of the policy and the second was the balance in the investment account that had accumulated within the exempt single-life policy up to the time of the death of the life insured. In this fact pattern, it is our view that the total of these two amounts would be “proceeds of a life insurance policy” for purposes of subparagraph (d)(ii) of the definition of “capital dividend account” in subsection 89(1) of the Act.
5 October 2012 Roundtable, 2012-0453231C6 F - Creditor's Group Life Insurance and CDA
Under an individual policy for loan insurance purchased by a borrowing corporation, the death benefit on the insured’s death is applied to repay the balance of the loan owing to the lender, with the ultimate excess being returned to the borrowing corporation. Would there be a credit to the borrowing corporation’s capital dividend account (“CDA”) of the excess of the entire death benefit over the adjusted cost basis (“ACB”) of the policy? CRA responded:
Innovative …[dealt with] a group creditor life insurance policy and not an individual life insurance policy. …[I]t would be reasonable to apply the same position in [Innovative to an individual life policy] provided that the borrowing corporation is able to demonstrate that the proceeds of the life insurance policy paid directly to the lending financial institution reduced the loan balance owing by the borrowing corporation to the financial institution, in accordance with existing contractual relationships between the parties.
In such a situation, any ACB of the borrowing corporation, being the holder of the life insurance policy, would reduce the amount that could be added to its CDA, where applicable.
7 October 2011 Roundtable, 2011-0407291C6 F - Group Life Insurance Policy
Professionals practising through a professional corporation hold a group term life insurance certificate as an insured, for which the policyholder is a professional association of which the insured is a member. They transfer the insurance certificate to their corporation so that it pays the premiums and receives the insurance proceeds on their death.
Would the life insurance proceeds paid to the corporation as a result of the death of the insured be added in the calculation of the capital dividend account ("CDA") under s. (d)(ii) the definition? Would the answer be the same if, by law, the insurance certificate were to continue to be issued in the name of the insured individual and the corporation was designated as the beneficiary of the proceeds of the insurance and paid the insurance premiums?
CRA responded:
Where a corporation is the beneficiary of a group term life insurance policy (of which the corporation was not a beneficiary on or before June 28, 1982) and receives proceeds of the insurance policy as a result of the death of a member who has designated the corporation as a beneficiary by virtue of the master agreement for the policy, the proceeds may ordinarily be added in the calculation of the corporation's CDA pursuant to subparagraph (d)(ii) of the CDA definition in subsection 89(1).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) | s. 15(1) could possibly apply where a professional corporation pays the premiums, and is designate the beneficiary, of a policy in name of professional | 148 |
4 July 2011 External T.I. 2011-0401991E5 F - CDA and life insurance proceeds
Innovative Installation found that proceeds of an insurance policy (whose premiums had been paid by a corporation (Innovative)) that the insurance company was required to pay over to a lender to Innovative in order to pay off the loan were an addition to the capital dividend account (CDA) of Innovative, as an amount of insurance proceeds that had been received by it. What is the CRA response to this case?
CRA stated:
In factual situations similar to the Innovative case, the CRA will apply the position adopted by the Court in that case.
Consequently, in a situation where a corporation can demonstrate that life insurance proceeds that were paid directly to a financial institution have reduced its debt to the financial institution, the life insurance proceeds will be considered as "received" by that corporation for the purpose of applying subparagraph (d)(ii) of the definition of CDA … .
In addition, comments in paragraph 6 of … IT-430R3 … will be modified … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Payment & Receipt | Insurance proceeds received by borrower where applied to repay its loan | 92 |
Subparagraph (d)(iii)
See Also
Rogers Enterprises (2015) Inc. v. The Queen, 2020 TCC 92
Sommerfeldt J. found that there was no abuse under s. 245(4) where, following the death of the insured in 2008, a corporate beneficiary’s capital dividend account was increased by the full insurance proceeds of $102M received by it rather than only by the excess of those proceeds over the adjusted cost basis of the policies to the policyholders (being mostly a grandparent with an ACB of $42M). In 1977, there had been a legislative change to reflect a policy that the addition to a corporate beneficiary’s CDA would now only be reduced by the policy’s ACB to it rather than by the ACB of the policy to any person. Accordingly, taking advantage of the fact that CGESR itself had a nil ACB for the policies, so that the bump to its CDA was $102M rather than $60M ($102M - $42M), accorded with the object and spirit of the provisions.
Furthermore, respecting a 2016 amendment (para. 105):
[N]otwithstanding the self-serving language and ambiguity in the Budget Supplementary Information and the Explanatory Notes issued by Finance in 2016, the object, spirit and purpose of the Reduction Provision, as amended, had clearly changed. After March 21, 2016, the object, spirit and purpose of the Reduction Provision, as amended, was to refer to the adjusted cost basis of a policyholder’s interest in the particular policy in order to determine the amount that could be added to the capital dividend account of a corporate beneficiary, even where that beneficiary was not the policyholder.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(1) - Tax Benefit | no tax benefit where alleged excessive CDA addition was not distributed to individual shareholders | 498 |
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | taking full credit to the CDA for insurance proceeds received, notwithstanding a positive ACB of the policyholder, reflected the policy of the CDA text | 415 |
Administrative Policy
8 May 2018 CALU Roundtable Q. 2, 2018-0745811C6 - CDA credit - joint ownership
Opco, which is owned 50/50 by the respective wholly-owned holdcos of Messrs. A and B (Holdco A and Holdco B) jointly owns with Holdco A (and Holdco B) an exempt life insurance “Policy A” on the life of Mr. A (and an exempt life insurance “Policy B” on the life of Mr. B), each of which names Opco as the beneficiary for $1 million and Holdco A (or B) as to the excess.
Opco pays the premium relating to $1 million of death benefit coverage in each case, and Holdco A and Holdco B make additional deposits on an annual basis into their respective joint policies.
On Mr. A’s death, the total death benefit to be paid under Policy A is $1.2 million and the adjusted cost basis (“ACB”) of Policy A is $150,000. What will be the addition to Opco’s and Holdco A’s CDA with respect to the total death benefit paid under Policy A? CRA stated:
As we noted in 2017-0690311C6, where there are multiple corporate beneficiaries designated under a policy, it is our view that each beneficiary must apply paragraph (d) of the definition of CDA independently. For the purposes of determining the addition to each beneficiary’s CDA, the portion of the death benefit received by each beneficiary must be reduced by the total of all amounts each of which is a policyholder’s ACB. In other words, the addition to each beneficiary’s CDA should be reduced by the total ACB of the life insurance policy.
[Here] the addition to the CDA of Holdco A with respect to the death benefit would be $50,000 ($200,000 death benefit received by Holdco A reduced by the total ACB of the policy which is $150,000). The addition to the CDA of Opco with respect to the death benefit is $850,000 ($1,000,000 death benefit received by Opco reduced by the total ACB of the policy which is $150,000).
18 May 2017 Roundtable, 2017-0690311C6 - CLHIA 2017 - Q1 CDA
Corporation A is the sole owner and premium payor for a life insurance policy with a death benefit of $1 million on the life of Mr. A. Corporation B and Corporation C are each designated as beneficiaries for 50% of the death benefit under this policy. Mr. A dies after March 21, 2016 at a time when the ACB of the policy to Corporation A is $200,000. Is $400,000 added to the CDA of each of Corporation B and Corporation C?
Before indicating that the CDA addition for each corporation was $300,000 (=$500,000-$200,000), CRA stated:
Where there are multiple corporate beneficiaries designated under a policy…for the purposes of determining the addition to each beneficiary’s CDA, the portion of the death benefit received by each beneficiary must be reduced by the full ACB of a policyholder’s interest in the policy. The wording of subparagraph (d)(iii) does not provide for a proration of the ACB in cases of multiple corporate beneficiaries.
Finance
6 October 2017 APFF Financial Strategies and Instruments Roundtable, Q.7
In 2017-0690311C6, Corporation A was the sole owner and premium payor for a life insurance policy with a death benefit of $1 million on the life of Mr. A. Corporation B and Corporation C were each designated as beneficiaries for 50% of the death benefit under this policy. Mr. A died after March 21, 2016 at a time that the adjusted cost basis (ACB) of the policy to Corporation A was $200,000. CRA considered that the addition to the capital dividend account (CDA) of each of Corporation B and Corporation C was $300,000 (=$500,000-$200,000), not $400,000, i.e., the full ACB reduces the CDA addition for each rather than being prorated. Could Finance comment on this situation? Finance responded:
[S.] (d)(iii) of the CDA definition has been amended to provide that the amount, that can be added to a corporation's CDA when proceeds are received pursuant to a life insurance policy under which the corporation is a beneficiary, is reduced by the total of the amounts each of which is the ACB of a policyholder’s interest in the policy.
The Department of Finance is prepared to address this issue as part of its ongoing review of the rules of the Income Tax Act.
Paragraph (g)
Administrative Policy
14 May 2013 External T.I. 2012-0469591E5 F - Capital dividend received by a trust and CDA
A Canadian-controlled private corporation paid a capital dividend to its sole shareholder, a trust, in 20x1. The beneficiaries of the trust were Mrs., minor children of Mr. and Mrs., and any corporations controlled by Mr. This capital dividend was not distributed by the trust in 20x1 as the children and Mrs. were designated persons and no corporation controlled by Mr. yet existed. Such a corporation was formed in 20x2.
CRA first noted that as the dividend was not payable to a beneficiary in 20x1, no s. 104(20) designation could be made in that year. As for 20x2, no s. 104(20) designation could be made for any distribution to the new corporate beneficiary in respect of a capital dividend received by the trust in the preceding year.
Turning to para. (g) of the CDA definition, CRA stated:
[T]he trust would not be able to allocate in 20X2 an amount to the newly formed corporation under subsection 104(20) in respect of the capital dividend paid to the trust in 20X1. As a result, the newly formed corporation would not be able to add to its CDA the amount received from the trust in respect of this dividend.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(20) | no recognition of capital dividend by corporate beneficiary where received by trust in Year 1 and distributed in Year 2 | 127 |
3 May 2010 External T.I. 2010-0358471E5 F - Capital dividend account - beneficiary of a trust
A trust received a capital dividend form a corporation and distributed it in the same year to a corporate beneficiary, and made a designation under s. 104(20) respecting such distribution. In indicating that the distributed amount should only be added to that corporation’s capital dividend account at the end of the trust's taxation year rather than as soon as the corporation received the distribution, CRA stated:
If the amount had been paid before the end of the trust's year, we are of the view that when the amount was received by the beneficiary corporation, we would not know whether the trust satisfied the condition that it had been resident in Canada throughout its taxation year. In addition, there would be no amount designated by the trust in respect of the dividend before the end of its taxation year since the designation is made in its income tax return filed for the taxation year in which it received the capital dividend.