S3-F2-C1, Capital Dividends

Introduction

The purpose of this Chapter History page is to highlight any amendments to the information contained in an interpretation bulletin that is now reflected in a chapter of an income tax folio as well as to identify any subsequent amendments to a folio chapter. It outlines amendments that have been made as a result of legislative changes and proposed legislative changes, precedential court decisions, as well as new or revised interpretations of the Canada Revenue Agency (CRA).

Update December 16, 2016

General

Income Tax Folio S3-F2-C1, Capital Dividends, replaces and cancels Interpretation Bulletin IT-66R6, Capital Dividends.

In addition to consolidating the content of the former interpretation bulletin, general revisions have been made to improve readability. Any substantive technical and interpretive changes to the information outlined in the former interpretation bulletin are described below. Except as otherwise noted, all statutory references herein are references to provisions of the Income Tax Act, R.S.C., 1985, c.1 (5th Supp.), as amended.

Legislative and other changes

¶1.17 (formerly in ¶1 of IT-66R6) has been expanded to refer to subsections 112(3), (3.1), (3.2) and (3.3) and to refer to Schedule 89 (Form T2SCH89, Request for Capital Dividend Account Balance Verification).

¶1.20 is a new paragraph that describes when a person must be a shareholder of a corporation to be entitled to a capital dividend.

¶1.22 (formerly in ¶4 of IT-66R6) has been reworded to correct the description of the formula for calculation of the penalty to accompany a late-filed election.

¶1.26 clarifies the date, previously described in ¶6 of IT-66R6, when the period referred to in ¶1.11 begins.

¶1.27 - 1.35 revise the description of the calculation of the component of the capital dividend account that takes account of capital gains and capital losses realized by a taxpayer.

¶1.36 (formerly ¶8 of IT-66R6) has been revised to delete, as unnecessary for reproduction in the Chapter, the description of the specific properties that are included in the definition of “designated property” in subsection 89(1).

¶1.37 (formerly ¶9 of IT-66R6) has been revised, in accordance with the Note to that paragraph ¶9 and pursuant to S.C. 1994, c. 7, Sch. II, s. 67(1), to remove the exception for designated property from amounts described in that paragraph that are excluded from a corporation’s capital dividend account.

¶1.38 is a new paragraph to comment, in relation to the capital dividend account, on the treatment of a capital gain deemed to be realized as a result of a forgiveness of the debt of a corporation.

¶1.39 is a new paragraph to comment, in relation to the capital dividend account, on the treatment of gains forming part of a corporation’s foreign accrual property income.

¶1.40 and 1.41 (formerly addressed in ¶11 of IT-66R6) expand the description of the effect on the capital dividend account of reserves claimed under subparagraph 40(1)(a)(iii).

¶1.42 and 1.43 are new paragraphs that describe the treatment of certain amounts earned or realized by a partnership in relation to a corporate partner’s capital dividend account.

¶1.44 is a new paragraph to highlight that net capital losses that, pursuant to subsection 111(4), are not deductible because of an acquisition of control will still reduce the capital gain component of the corporation’s CDA.

¶1.48 and 1.49 are new paragraphs that describe when capital dividends received by a partnership will be included in the capital dividend accounts of its corporate partners.

¶1.50 is preceded by a new paragraph that gives notice of a proposed legislative change contained in Bill C-29, Budget Implementation Act, 2016, No. 2, in respect of measures in the March 22, 2016 federal budget, that will reclassify eligible capital property as depreciable property effective January 1, 2017.

¶1.50 - 1.58 have been added to revise the description of the calculation of the component of the capital dividend account that takes account of gains and losses realized in connection with the disposition of eligible capital property.

¶1.59 - 1.72 have been added to describe the treatment of proceeds of life insurance policies in relation to the capital dividend account. The paragraphs reflect legislative changes made by S.C. 2013, c. 40, s. 41(1) and describe the exception made for amounts received as proceeds of a leveraged insurance annuity policy (an LIA policy) and the reduction to the capital dividend account in respect of a 10/8 policy. The paragraphs also describe the treatment of life insurance proceeds received in connection with policies used as security for debt and takes account of the 2010 Federal Court of Appeal decision in Canada v. Innovative Installation Inc., 2010 FCA 285, 2010 DTC 5175 aff’g. 2009 TCC 580, 2009 DTC 1388 (TCC)).

A new paragraph also gives notice of proposed legislative changes contained in Bill C-29, Budget Implementation Act, 2016, No. 2, in respect of measures in the March 22, 2016 federal budget, that will limit or reduce the amount that, in respect of the receipt of life insurance proceeds, may be added to the CDA and to the adjusted cost base of an interest in a partnership.

¶1.73 - 1.75 are new paragraphs that describe the treatment of the capital dividend account of a beneficiary of a trust in relation to amounts earned or realized by a trust, as introduced by S.C. 2001, c. 17, s. 67(3).

A new paragraph also gives notice of a proposed legislative change contained in draft legislation released September 16, 2016 respecting the treatment of the non-taxable portion of capital gains realized by a trust that may be added to a corporate beneficiary’s CDA.

¶1.77 is a new paragraph that describes and illustrates the manner in which capital dividends paid by a corporation may delay the payment of future capital dividends.

¶1.79 and 1.80 (formerly ¶7 of IT-66R6) have been revised as a result of a change to paragraph 87(2)(z.1), pursuant to S.C. 1994, c. 7, Sch. II, s. 65(7), to deem the new corporation to be the same corporation as, and a continuation of, each predecessor corporation. A numerical example of the application of this provision is also given.

¶1.82 is a new paragraph to describe a special capital dividend election that is available for a winding-up dividend pursuant to subparagraph 88(2)(b)(i).

¶1.84 is a new paragraph that describes when a dividend deemed to be paid pursuant to subsection 84.1(1) may be treated as a capital dividend.

¶1.86 - 1.89 (formerly ¶17 of IT-66R6) have been revised, pursuant to S.C. 2013, c. 34, s. 327(1) to describe the applicable tax rate in subsection 184(2). They also describe the joint and several liability of the recipients of a dividend for Part III tax that was added by S.C. 1994, c. 7, Sch. II, s. 153(1) and amended by S.C. 2013, c. 34, s. 150(1).

¶1.91 (formerly ¶18 of IT-66R6) has been revised to change the description of the time when, and the circumstances in which, an election may be made for the purposes of subsection 184(3) due to changes contained in S.C. 1994, c. 7, Sch. II, s. 152(1) and in S.C. 2013, c. 34, s. 327(1).

¶1.92 (formerly ¶19 of IT-66R6) revises the description of the time when a shareholder is deemed to receive each separate dividend referred to in subsection 184(3) from the date of receipt of the dividend to the date that each separate dividend became payable, due to changes contained in S.C.2013, c. 34, s. 327(1).

¶1.93 is a new paragraph that describes an administrative policy of the CRA that may allow a corporation to object to an assessment of Part III tax while, at the same time, making an election for the purposes of subsection 184(3).

¶1.95 is a new paragraph to address the 2013 Federal Court of Appeal decision in Groupe Honco Inc. v. Canada, 2013 FCA 128, 2014 DTC 5006 (FCA), aff’g. 2012 TCC 305, 2013 DTC 1032 (TCC).