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

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83(2); 184(3); 185(1); 185(3)

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Principal Issues: 1. If a corporation had an excessive capital dividend and made an election to treat the excess as a taxable dividend to the shareholders, when will the taxable dividend be considered to have been received where the capital dividend is still unpaid?

2. Is there a prescription with respect to a capital dividend?

3. If there is an excessive capital dividend but Part III tax cannot be reassessed because it is prescribed, will 184(3) apply?

Position: 1. The shareholders will be considered to have received the taxable dividend at the time the original dividend became payable. Therefore, if the dividend was payable at the time of the excess, the shareholder would be taxed at that time even though they had not received the dividend payment at that time.

2. There is no statute-barred period with respect to the capital dividend account. With respect to the capital dividend election and Part III, subsection 185(1) provides that the Minister shall, with all due dispatch, examine each election made by a corporation in accordance with subsection 83(2), assess the tax, if any, payable under Part III in respect of the election and send a notice of assessment to the corporation. According to subsection 185(3), subsection 152(4) is applicable to Part III with such modifications as the circumstances require. Therefore, if there is no misrepresentation attributable to neglect, carelessness or wilful default or any fraud and if there is no waiver filed with the Minister, the Minister could not reassess Part III after the normal reassessment period. This normal reassessment period would be determined considering the date of the Part III original assessment with respect to this election.

3. No.

Reasons: 1. Wording of the Act.

2. Wording of the Act.

3. A corporation may elect to treat excess as separate dividend pursuant to subsection 184(3) only if it is required to pay a tax under Part III in respect of the excess.

APFF FEDERAL TAX ROUNDTABLE 6 OCTOBER 2017
APFF CONFERENCE 2017

Question 10

Excess capital dividend election

Section 83(2) allows a corporation to elect to pay its shareholders a dividend from its capital dividend account. Where the amount of the original dividend exceeds the amount of the corporation's capital dividend account, the corporation may make a subsection 184(3) election "in respect of an original dividend payable" so that the amount in excess of the CDA is treated as a separate taxable dividend. If this election has not been made, the corporation declaring the dividend must pay a tax on the amount of the dividend exceeding it capital dividend account (subsection 184(2)). Where the election under subsection 184(3) is made, paragraph 184(3)(d) provides as follows:

“(d) each person who held any of the issued shares of the class of shares of the capital stock of the corporation in respect of which the original dividend was paid is deemed

(i) not to have received any portion of the original dividend, and

(ii) to have received, at the time that any separate dividend determined [...].”

The election provided under subsection 184(3) can be made where a dividend payable by the corporation exceeds its CDA, while paragraph 184(3)(d) provides that the shareholder to whom the dividend has been paid is deemed to have received a separate dividend.

Such an excess dividend can arise inter alia following a request from the CRA to confirm the capital dividend account balance.

Questions to the CRA

(a) Does the excess portion of a capital dividend that was declared but not yet paid and that has been the subject of an election under subsection 184(3) remain non-taxable to the shareholder for so long as it remains unpaid pursuant to subsection 82(1)?

(b) If following, a request for confirmation of the CDA balance, a capital dividend is paid based on such confirmation, is the capital dividend and confirmation statute-barred?

(c)If in that situation the capital dividend is excessive and is outside the reassessment period, will subsection 184(3) apply?

CRA response to Question 10(a)

Subparagraph 184(3)(d)(ii) provides that it is at the time that any separate dividend determined under any of paragraphs (a) to (c) became payable, that each of the persons who held shares of the class of shares of the capital stock of the corporation on which the initial dividend was paid is deemed to have received the proportion of that dividend that the number of shares of that class held by the person at the particular time is of the number of shares of that class outstanding at the particular time.

The portion of the excess of the initial dividend over the CDA referred to in paragraph 184(3)(c) is deemed to be a separate taxable dividend that became payable at the particular time. The particular time is the time when the initial dividend was payable.

Consequently, under the current wording of subparagraph 184(3)(d)(ii), as the separate taxable dividend is deemed, for the purposes of paragraph 12(1)(j) and subsection 82(1), to have been received at the time the initial dividend was payable, such dividend may be taxed in a taxation year preceding the year in which the dividend was actually paid.

The CRA has already brought this matter to the attention of the Department of Finance.

CRA response to Question 10(b)

The capital dividend account is not technically subject to a limitation period.

With respect to a capital dividend and Part III tax, subsection 185(1) provides that the Minister shall, with all due dispatch, examine each election made by a corporation in accordance with subsection 83(2), assess the tax, if any, payable under Part III in respect of the election and send a notice of assessment to the corporation.

In this regard, subsection 185(3) provides, inter alia, that subsection 152(4) applies to Part III, with such modifications as the circumstances require. Thus, without the application of any other statutory provision expressly providing for different rules (such as for objections and appeals), the Minister may only issue a notice of reassessment in respect of Part III tax according to the rules provided in subsection 152(4).

Consequently, where a situation does not involve a misrepresentation of the facts through negligence, carelessness or willful default or fraud, and where there has been no waiver in the prescribed form, the Minister would not be able to issue a notice of reassessment in respect of tax under Part III after the normal reassessment period as defined in subsection 152(3.1). This normal reassessment period would be calculated by taking into account the date of the first notice of assessment issued in respect of the Part III tax, if any, in respect of the election made under subsection 83(2).

CRA response to Question 10(c)

If a corporation is required, in the absence of subsection 184(3), to pay a tax under Part III in respect of the excess of the initial dividend over the capital dividend account , the corporation may make an election in the prescribed form not later than the ninetieth day after the day of the notice of assessment relating to tax payable under Part III for the rules set out in subsection 184(3) to apply.

Thus, it would be possible to make an election under subsection 184(3) if a notice of reassessment were issued provided that the prescribed terms and conditions were followed and provided that the corporation elected not later than the 90^th day on which the notice of reassessment was sent.

On the other hand, if the Minister could no longer assess under Part III, the condition for making an election under subsection 184(3) would not be satisfied given that the corporation would not have tax payable under Part III.

Sylvie Labarre

October 6, 2017
2017-070908

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Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

2. Is there a prescription with respect to a capital dividend?

3. If there is an excessive capital dividend but Part III tax cannot be reassessed because it is prescribed, will 184(3) apply?

3. No.

Reasons: 1. Wording of the Act.

2. Wording of the Act.

3. A corporation may elect to treat excess as separate dividend pursuant to subsection 184(3) only if it is required to pay a tax under Part III in respect of the excess.

TABLE RONDE SUR LA FISCALITÉ FÉDÉRALE DU 6 OCTOBRE 2017
APFF - CONGRÈS 2017

Question 10

Choix de dividende en capital excédentaire

Le paragraphe 83(2) L.I.R. permet à une société par actions de faire le choix de payer à ses actionnaires un dividende du compte de dividendes en capital. Lorsque le montant du dividende initial excède le montant du compte de dividendes en capital de la société, la société peut faire le choix du paragraphe 184(3) L.I.R. « à l’égard du montant initial payable » de sorte que le montant excédant le compte de dividendes en capital soit traité comme un dividende imposable distinct. N’eût été ce choix, la société ayant déclaré le dividende devrait payer un impôt sur le montant du dividende excédent son compte de dividendes en capital (paragraphe 184(2) L.I.R.). Lorsque le choix du paragraphe 184(3) L.I.R. est fait, l’alinéa 184(3)d) L.I.R. prévoit ce qui suit :

d) chacune des personnes qui détenaient des actions émises de la catégorie d'actions du capital-actions de la société sur laquelle le dividende initial a été versé est réputée :

(i) n'avoir reçu aucune partie du dividende initial,
(ii) avoir reçu, au moment où un dividende distinct déterminé [...]

Le choix prévu au paragraphe 184(3) L.I.R. peut être fait lorsqu’un dividende payable par la société excède son compte de dividendes en capital alors que l’alinéa 184(3)d) L.I.R. prévoit que l’actionnaire à qui ce dividende a été versé sera présumé avoir reçu un dividende distinct.

Un tel dividende excédentaire peut entre autres découler d’une demande de confirmation du solde du compte de dividendes en capital auprès de l’ARC.

Questions à l’ARC

a) Est-ce que la portion excédentaire d’un dividende en capital qui a été déclaré, mais non encore versé et qui a fait l’objet d’un choix en vertu du paragraphe 184(3) L.I.R. demeure non imposable dans les mains de l’actionnaire aussi longtemps qu’il demeure impayé conformément au paragraphe 82(1) L.I.R.?

b) Si l’on demande une confirmation du solde du compte de dividendes en capital et que l’on verse un dividende en capital sur la base de cette confirmation, est-ce que le dividende en capital et la confirmation se prescrivent?

c) Si le dividende en capital est excédentaire dans ce dernier cas, et qu’il est hors période de cotisation, est-ce qu’il y aura application du paragraphe 184(3) L.I.R.?

Réponse de l’ARC à la question 10a)

Le sous-alinéa 184(3)d)(ii) L.I.R. prévoit que c’est au moment où un dividende déterminé selon l’un des alinéas 184(3)a) à c) L.I.R. est devenu payable que chacune des personnes, qui détenaient des actions émises de la catégorie d’actions du capital-actions de la société sur laquelle le dividende initial a été versé, est réputée avoir reçu la proportion de ce dividende que représente le rapport entre le nombre d’actions de cette catégorie qu’elle détenait au moment donné et le nombre d’actions de cette catégorie qui étaient en circulation à ce moment.

La partie de l’excédent du dividende initial sur le compte de dividendes en capital qui est visée à l’alinéa 184(3)c) L.I.R. est réputée être un dividende imposable distinct qui est devenu payable au moment donné. Ce moment donné est le moment où le dividende initial était payable.

Par conséquent, selon le libellé actuel du sous-alinéa 184(3)d)(ii) L.I.R., étant donné que le dividende imposable distinct est réputé, aux fins de l’alinéa 12(1)j) L.I.R. et du paragraphe 82(1) L.I.R., avoir été reçu au moment où le dividende initial était payable, ce dividende pourrait être imposé dans une année d’imposition antérieure à celle où ce dividende a réellement été versé.

L’ARC a déjà porté cette situation à l’attention du ministère des Finances.

Réponse de l’ARC à la question 10b)

Le compte de dividendes en capital n’est pas techniquement assujetti à une période de prescription.

Pour ce qui est du dividende en capital et de l’impôt de la partie III L.I.R., le paragraphe 185(1) L.I.R. édicte que le ministre examine avec diligence chaque choix que fait une société conformément au paragraphe 83(2) L.I.R., établit en tenant compte de ce choix l’impôt éventuel payable en vertu de la partie III L.I.R. et envoie un avis de cotisation à cette société.

À cet égard, le paragraphe 185(3) L.I.R. édicte entre autres que le paragraphe 152(4) L.I.R. s’applique à la partie III L.I.R., avec les adaptations nécessaires. Ainsi, en l’absence de l’application de toute autre disposition législative prévoyant expressément des règles différentes (comme celles visant les oppositions et les appels), le ministre pourra uniquement émettre un nouvel avis de cotisation à l’égard de l’impôt de la partie III L.I.R. selon les règles prévues au paragraphe 152(4) L.I.R.

Par conséquent, lorsqu’une situation n’implique pas une présentation erronée des faits par négligence, inattention ou omission volontaire ni de fraude et lorsqu’il n’y a pas eu de renonciation selon le formulaire prescrit, le ministre ne pourrait pas émettre un nouvel avis de cotisation à l’égard de l’impôt de la partie III L.I.R. après la période normale de nouvelle cotisation telle que définie au paragraphe 152(3.1) L.I.R. Cette période normale de nouvelle cotisation serait calculée en tenant compte de la date de l’avis de première cotisation émis relativement à l’impôt de la partie III L.I.R., le cas échéant, visant le choix fait en vertu du paragraphe 83(2) L.I.R.

Réponse de l’ARC à la question 10c)

Dans le cas où une société serait tenue, en l’absence du paragraphe 184(3) L.I.R., de payer un impôt de la partie III L.I.R. à l’égard de l’excédent du dividende initial sur le compte de dividendes en capital, la société peut faire un choix selon les modalités réglementaires au plus tard le quatre-vingt-dixième jour suivant la date d’envoi de l’avis de cotisation relatif à l’impôt payable en vertu de la partie III L.I.R. pour que les règles prévues au paragraphe 184(3) L.I.R. s’appliquent.

Ainsi, il serait possible d’effectuer un choix en vertu du paragraphe 184(3) L.I.R. si un nouvel avis de cotisation était émis pourvu que les modalités réglementaires soient suivies et pourvu que la société fasse le choix au plus tard le quatre-vingt-dixième jour suivant la date d’envoi de ce nouvel avis de cotisation.

Par contre, si le ministre ne pouvait plus établir de cotisation en vertu de la partie III L.I.R., la condition d’application pour faire le choix prévu au paragraphe 184(3) L.I.R. ne serait pas respectée étant donné que la société n’aurait pas d’impôt de la partie III L.I.R. à payer.

Sylvie Labarre
Le 6 octobre 2017
2017-070908

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 184 - Subsection 184(3)

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

The s. 184(3)(b) excess dividend election is made respecting the amount of the original dividend that was payable. S. 184(3)(d) deems the shareholder to have received the excess dividend. Does the excess portion of a dividend, that was declared but not paid and that was elected upon under s. 184(3), remain non-taxable to the shareholder for so long as it remains unpaid? CRA responded:

[U]nder the current wording of subparagraph 184(3)(d)(ii), as the separate taxable dividend is deemed, for the purposes of paragraph 12(1)(j) and subsection 82(1), to have been received at the time the initial dividend was payable, such dividend may be taxed in a taxation year preceding the year in which the dividend was actually paid.

The CRA has already brought this matter to the attention of the Department of Finance.

Where an excessive capital dividend is made outside the reassessment period, will s. 184(3) apply? After referring to the 90-day period in the preamble to s. 184(3), CRA stated:

Thus, it would be possible to make an election under subsection 184(3) if a notice of reassessment were issued provided that the prescribed terms and conditions were followed and provided that the corporation elected not later than the 90^th day on which the notice of reassessment was sent.

On the other hand, if the Minister could no longer assess under Part III, the condition for making an election under subsection 184(3) would not be satisfied given that the corporation would not have tax payable under Part III.

Summary Under

Tax Topics - Income Tax Act - Section 185 - Subsection 185(3)

normal reassessment period starts running from date of Pt III assessment

If following, a request for confirmation by CRA of the CDA balance, a capital dividend is paid based on such confirmation, is an assessment of the capital dividend under Part III statute-barred? CRA responded:

[S]ubsection 185(3) provides, inter alia, that subsection 152(4) applies to Part III, with such modifications as the circumstances require. ...

Consequently, where a situation does not involve a misrepresentation of the facts through negligence, carelessness or willful default or fraud, and where there has been no waiver in the prescribed form, the Minister would not be able to issue a notice of reassessment in respect of tax under Part III after the normal reassessment period as defined in subsection 152(3.1). This normal reassessment period would be calculated by taking into account the date of the first notice of assessment issued in respect of the Part III tax, if any, in respect of the election made under subsection 83(2).

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

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