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.
Principal Issues: Whether the CRA has the authority under the Act to reassess the taxation year of a corporation in which it paid an excessive capital dividend in order to reflect the corresponding changes resulting from the CRA’s acceptance of its subsection 184(3) election, including the deemed payment of a taxable dividend and possibly a dividend refund, if the taxation year is statute barred.
Position: Depends on the facts and circumstances.
Reasons: Generally speaking, if the corporation had previously filed a T2 return that reported a dividend refund (within the period required by subsection 129(1)), the Minister may redetermine that dividend refund to reflect the deemed taxable dividend resulting from the subsection 184(3) election provided that the normal redetermination period has not ended. If a dividend refund was not previously reported, the Minister may determine any amount of dividend refund, provided that the other necessary conditions of subsection 129(1) have been met. In any event, the correct amount of impacted balances should be used in subsequent taxation years under the New St. James principle.
July 23, 2025
Alexis Riel HEADQUARTERS
XXXXXXXXXX Income Tax Rulings
Directorate
Business Returns Directorate, ABSB Julia Clarkson
2025-105691
(Re)assessment and (re)determination of amount impacted by a subsection 184(3) election
All statutory references in this document are to the Income Tax Act, R.S.C. 1985, (5th Suppl.) c.1, as amended (the Act), unless stated otherwise.
We are writing in reply to your inquiry of March 12, 2025 in which you requested our views regarding the (re)assessment and (re)determination of amounts impacted by an election made under subsection 184(3).
More specifically, you ask whether the CRA has the authority under the Act to reassess the taxation year of a corporation in which it paid an excessive capital dividend in order to reflect the corresponding changes to the corporation that result from the CRA’s acceptance of its subsection 184(3) election, including the deemed payment of a taxable dividend and possibly a dividend refund, if the taxation year is statute barred for Part I tax purposes.
Please note that we have assumed that the corporation making the subsection 184(3) election has previously filed a Form T2054 as and when required under subsection 83(2). We have also assumed that paragraph 152(4)(a) is not applicable with respect to the taxation year in which the dividend was paid.
Corresponding changes to the shareholders of the corporation as a result of the subsection 184(3) election, which most likely are addressed under subsections 184(4) and 152(4.31), are not addressed in detail in this response.
Upon filing an election under subsection 83(2), subsection 185(1) provides that the Minister shall, with all due dispatch, examine the election, assess any Part III tax that might be payable under subsection 184(2), and send a notice of assessment to the corporation. The issuance of an original notice of assessment (or original notification that no Part III tax is payable) would begin the normal reassessment period for Part III tax purposes, as authorized by subsection 184(3). Note that this normal reassessment period (defined under a modified version of subsection 152(3.1)) is separate from the normal reassessment period for Part I tax.
A reassessment of Part III tax is authorized (due to subsection 185(3)) under a modified version of subsection 152(4), and is separate and distinct from a reassessment of Part I tax.
A Part III tax liability arises where the corporation has paid a capital dividend that is in excess of its capital dividend account. It is possible for a corporation to completely avoid having to pay Part III tax by making a subsection 184(3) election, which would have the effect of deeming the corporation to have paid two separate dividends: a capital dividend in the amount equal to what was available in the corporation’s capital dividend account, and a taxable dividend in the amount of the excess. This taxable dividend may, depending on the eligible refundable dividend tax on hand (ERDTOH) and non-eligible refundable dividend tax on hand (NERDTOH) of the corporation, result in the calculation of an amount of a dividend refund for the corporation under subsection 129(1).
If there is no dividend refund available to the corporation after having made a subsection 184(3) election, then when assessing subsequent taxation years the Minister is able to use the correct amounts for affected balances, such as the capital dividend account, ERDTOH and NERDTOH. This is supported by the New St. James principle, as most recently summarized in Gupta v The King (2023 TCC 82) as follows:
“[25] As a result, it is well established that the Minister may consider the actual facts in the prior years even if in assessing a prior year the Minister had proceeded on a different factual basis.10 Similarly, if in a prior year, the Minister makes an error in applying the law in a prior year, the Minister may correct the error when assessing a later year.
[26] For example, in Coastal Construction & Excavating Ltd. v. R.11, Justice Bowman, as he then was, says:
24 Finally, the appellant contends that because the Minister, in prior years, had treated the operation as a "facility" as defined in the RDIA he was not entitled to change the investment tax credit carry-forward from those admittedly statute-barred years to affect the taxable income of a year that was not statute-barred to conform to his view that the property was qualified and not certified. This interpretation would involve a conclusion that a determination of the balance of a carry-forward of investment tax credits for a statute-barred year was tantamount to an assessment. I do not read section 152 of the Income Tax Act as supporting such a conclusion. The Minister is obliged to assess in accordance with the law. If he assesses a prior year incorrectly and that year becomes statute-barred this will prevent his reassessing tax for that year, but it does not prevent his correcting the error in a year that is not statute-barred, even though it involves adjusting carry-forward balances from previous years, whether they be loss carry-forwards or balances of investment tax credits. New St. James Ltd. v. Minister of National Revenue… (Citations omitted)
(Emphasis added)
[27] More recently, in Peach v. The Queen12 Justice Monaghan, as she then was, stated:
[66] The law is clear that:
"if an error is made in the assessment of a statute-barred year, which affects another year, the Minister, in assessing the other year, must follow the Act and if there was an error in law in a previous year, including a statute-barred year, that error ought to be corrected so that the assessment for the current year is correct".
(Citations omitted)
[28] This is a general principle that is limited only in certain very specific situations pursuant to specific provisions of the Income Tax Act.”
One of the criteria to being able to receive a dividend refund is that the corporation has filed a return of income (T2 return) within three calendar years of the relevant taxation year. Based on the decision for Bonnybrook Park Industrial Development Co Ltd v MNR (2018 FCA 136), the Minister has the discretion under subsection 220(3) to extend the three-year limitation period where it is considered just and equitable to do so.
Another criterion of being able to receive a dividend refund is that the corporation has been sent a notice of assessment for the taxation year. While subsection 129(1) does not refer to a notification that no tax is payable, it is our view that the context and purpose of the reference to a notice of assessment was intended to also refer to a notification that no tax is payable. This view is supported by the following:
- comments made by the Federal Court of Appeal in paragraphs 66 to 71 of the decision for The Queen v 984274 Alberta Inc. (2020 FCA 125), which discusses this issue with respect to subsection 164(1), a provision similar to subsection 129(1)
- an interpretation of the legislation that is “guided by the text, context and purpose of” (endnote 1) subsection 129(1)
- section 12 of the Interpretation Act, which requires each enactment to be treated as remedial, and be given “fair, large and liberal construction and interpretation” to “best ensure” its objectives.
If the corporation has previously filed a T2 return that did not report a dividend refund within the required subsection 129(1) limitation period (be it extended or not), then the normal redetermination period (as defined under a modified version of subsection 152(3.1)) for a dividend refund would not yet have commenced. Jurisprudence, including comments made in the decisions for Theratechnologies Inc. v MNR (2012 FC 1376), Signalgene R&D Inc. v MNR (2012 FC 1375), and Perfect Fry Company Ltd. v The Queen (2007 TCC 133), supports the view that a normal reassessment period for Part I tax purposes is separate from a normal redetermination period for a dividend refund.
A request to have a determination of a dividend refund made by the corporation, for example, in an amended return, would require the Minister to examine the amended return, determine the amount of dividend refund, if any, under paragraph 152(1)(a), and issue a notice of determination (or notification that no dividend refund is refundable) under (modified) subsection 152(2). These modifications of section 152 are provided for in subsection 152(1.2).
Therefore, if a dividend refund had been declared in the previously filed T2 return of the corporation, then the normal redetermination period for a dividend refund would have commenced on the date that an original notice of determination (or original notification that no dividend refund was payable) was sent to the corporation. If this normal redetermination period has expired before the corporation’s subsection 184(3) election is processed, then the corrected balances of the capital dividend account, ERDTOH and NERDTOH may be used in subsequent taxation years.
Note that even though an amount of a dividend refund may have been calculated for the taxation year in which the deemed taxable dividend arose as a result of a subsection 184(3) election, subsequent taxation years cannot recognize a reduction for that dividend refund in relevant calculations where it was not refunded to the taxpayer. (endnote 2) As a result, a dividend refund may be received upon the payment of future taxable dividends.
A subsection 184(3) election is listed in section 600 of the Income Tax Regulations, and therefore is considered a prescribed election for purposes of subsection 220(3.2). As a result, the Minister generally has the discretion to authorize that a subsection 184(3) election be filed late, amended or revoked provided that the taxpayer requests this relief “on or before the day that is ten calendar years after the end” of the relevant taxation year. Where relief is provided under subsection 220(3.2), the taxpayer is subject to a penalty under subsection 220(3.5), which the Minister generally has the discretion to fully or partially cancel or waive under subsection 220(3.1).
In addition, subsection 220(3.4), notwithstanding subsections 152(4), (4.01), (4.1) and (5), requires the Minister to make an assessment or reassessment of the tax, interest and penalties payable by each taxpayer in respect of any taxation year that began before the day an application is made under subsection 220(3.2) as is necessary to take into account the impact of the subsection 184(3) election that was granted relief under subsection 220(3.2).
It is our understanding that there are no Part I tax implications to a payor corporation from making a subsection 184(3) election, so no Part I tax (re)assessment would be required to be made under subsection 220(3.4) with respect to the taxation year of the payor corporation. Subsection 220(3.4) would, however, authorize the (re)assessment of other taxpayers impacted by the election for Part I or IV purposes, or the payor corporation for Part III purposes, if the normal reassessment periods for those taxes had ended.
However, subsection 152(1.2) does not authorize the modification of subsection 220(3.4) to effectively allow for the extension of the period within which the Minister is required to make a determination or redetermination. The exclusion of wording referring to a determination in subsection 220(3.4) indicates an intention of Parliament to not extend taxpayer relief to determinations of balances, such as a dividend refund. As a result, in our view the provision of taxpayer relief under subsection 220(3.2) would not support the redetermination of a dividend refund in circumstances where the normal redetermination period of a taxpayer for the relevant taxation year has expired.
This view is in contrast to our comments in technical interpretation E 2003-0051211I7 which concludes that subsection 220(3.4) authorizes the reassessment of a payor corporation “to take into account adjustments to its dividend refund” that would be required due to the deemed payment of a taxable dividend resulting from a subsection 184(3) election that was provided relief under subsection 220(3.2). As a result of changes in jurisprudence addressing the determination of refundable amounts under subsection 152(1) noted above, essentially being that the determination of a dividend refund is made separately from an assessment or reassessment of tax, this document no longer reflects the position of the CRA.
We trust that these comments will be of assistance.
Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.
Yours truly,
Gillian Godson
Manager, Administrative Law Section I
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1. See paragraph 10 of the decision for Canada Trustco Mortgage Co. v. Canada (2005 SCC 54).
2. See paragraphs 8 and 60 of Presidential MSH Corporation v The Queen (2015 TCC 61).
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