CAPITAL DIVIDEND ACCOUNT (CDA) – ANTI-AVOIDANCE PROVISION

Issue 441, May 2018

Where one of the main purposes of a series of transactions which includes an acquisition of a share is to receive a capital dividend on the share acquired, the dividend is generally deemed to be paid and received as a taxable dividend (Subsection 83(2.1)) absent an exception. See VTN 383(9) for a case where this provision converted a capital dividend to a taxable dividend.

In a November 9, 2017 Technical Interpretation (2017-0704221E5, Seguin, Marc), CRA considered the potential application of this anti-avoidance provision where a resident individual acquired the shares of a corporation with a CDA balance.

a careful review of all of the facts

CRA noted that there are several exceptions to the conversion of a capital dividend to a taxable dividend. One exception is where it is reasonable to consider the purpose of the capital dividend is to distribute an amount received by the corporation which was added to its CDA due to receipt of life insurance benefits (Subsection 89(2.3)). CRA noted that it was a question of fact whether this purpose test was met.

More complex exceptions exist where capital dividends flow through multiple corporations or there has been an amalgamation to enable the life insurance to be paid out without conversion to a taxable dividend.

In the hypothetical example considered by CRA, the CDA balance under discussion arose from the proceeds of a life insurance policy on the death of a shareholder. CRA opined that even where one of the main purposes of the share purchase by the individual was to receive a capital dividend, the anti-avoidance provision would not apply due to these exceptions.

CRA also noted that, even where a technical exception applies, the General Anti-Avoidance Rule (GAAR, Section 245) could apply based on all of the facts and circumstances.

Editors’ Comment
The exceptions to Subsection 83(2.1) are detailed and complex. A careful review should be undertaken when planning a capital dividend payment to a shareholder who acquired shares after events giving rise to the CDA occurred. In addition, if a purchase of shares of a corporation with a CDA balance is being considered these provisions should be reviewed.

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