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: If capital loss suffered in subsequent year after paying a capital dividend would trigger an excess amount.
Reasons: Calculation of CDA is "at any particular time" and therefore capital losses incurred in subsequent years affect from the time the loss was incurred forward.
Author: McPherson, Ryan
January 22, 2019
Re: Calculation of the Capital Dividend Account
This is in reply to your correspondence dated December 29, 2018, wherein you expressed some concerns about the calculation of the capital dividend account and the payment of a capital dividend in the following fact situation.
In Year 1, a corporation realized a capital gain of XXXXXXXXXX and a $XXXXXXXXXX capital dividend was paid in that year. In Year 2, the corporation realized a capital loss. You want to know if the capital loss realized by the corporation in Year 2 affects the amount paid as a capital dividend in Year 1 such that there would be an excess amount that would be subject to Part III tax.
Unless otherwise stated, every legislative reference herein is a reference to the relevant provision of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (hereafter the “ITA”).
This technical interpretation provides general comments about the provisions of the ITA and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R8, Advance Income Tax Rulings and Technical Interpretations. This and all other publications noted herein are available online at canada.ca.
Income Tax Folio S3-F2-C1: Capital Dividends (the Folio), discusses and provides the Canada Revenue Agency’s general views on the payment of a capital dividend under subsection 83(2) by a “private corporation” as defined in subsection 89(1) and the computation of such a corporation’s “capital dividend account” (CDA) as also defined in subsection 89(1). In particular, Example 4 following paragraph 1.77 in the Folio, described a situation that appears to be relevant to the issue raised in your correspondence. It states:
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.
In the above Example, as the balance of Corporation Z’s CDA immediately before the time the capital dividend was paid in year 1 was $100,000 (the non-taxable portion of the capital gain) the capital dividend of $100,000 was paid. The non-deductible portion of the capital loss was included in Component 1 of Corporation Z’s CDA in year 2. 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.
It is worth noting that paragraphs 1.27 to 1.77 of the Folio discuss the 6 components that make up a corporation’s capital dividend account and paragraph 1.85 of the Folio deals with overstatements of the CDA and provides 3 examples of where an overstatement can occur.
We trust these comments will be of assistance to you.
Michael Cooke, CPA, CA
Corporate Reorganizations Section II
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.
© Her Majesty the Queen in Right of Canada, 2019
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2019
For additional commentary on Technical Interpretations, court cases, government releases, and conference materials in a single practical document specifically geared toward owner-managed businesses, see Video Tax News Monthly Tax Update newsletter.
This effective summary and flagging tool is the most efficient way to ensure that you, your firm, and clients are fully supported and armed for whatever challenges are thrown your way.
Packages start at $399/year.