ARCHIVED - Income Tax Interpretation Bulletin

From: Canada Revenue Agency

Winding-up Dividend

What the "Archived Content" notice means for interpretation bulletins

NO: IT149R4

DATE: June 28, 1991

SUBJECT: INCOME TAX ACT
Winding-up Dividend

REFERENCE: Subsection 88(2) (also subsections 83(2), 84(2), 133(7.1), paragraph 148(9)(a) and subparagraphs 54(h)(ix), 89(1)(b)(iv) and (v))

Application

This bulletin replaces and cancels Interpretation Bulletin IT-149R3 dated July 22, 1985. Current revisions are designated by vertical lines.

Summary

This bulletin discusses the "winding-up dividend" that results when certain Canadian corporations are wound up. It also discusses how the Act establishes the portion of the amount, received by the shareholders in a winding-up, that is taxable in their hands. Essentially, the law provides that any amount received in excess of paid-up capital is deemed to be a dividend. However, depending on the type of corporation, this winding-up dividend can be broken into separate amounts arising from

(a) the capital dividend account,

(b) the capital gains dividend account,

(c) the pre-1972 capital surplus on hand, and

(d) after June 28, 1982 and before May 24, 1985, the life insurance capital dividend account.

Any excess, after distributing the above amounts, is a taxable dividend.

Discussion and Interpretation

Distributions on Winding-up

1. Subsection 88(2) provides special rules to facilitate the distribution of property on the winding-up (see 3 below) of a Canadian corporation to which subsection 88(1) does not apply. For subsection 88(2) to apply in the course of the winding-up of such a corporation, all or substantially all of the property owned by the corporation must be distributed to its shareholders. It does not require that there be a single distribution of property on winding-up. However, where there is a series of distributions in the course of winding-up, subsection 88(2) usually applies to the last such distribution, when it can be said that all or substantially all of the property owned immediately beforehand has been distributed to the shareholders. Generally, the only property owned by the corporation after this final distribution will be cash or other liquid assets to be used for the payment of taxes and any remaining costs of liquidation. If a relatively small amount of property remains in the corporation for distribution to the shareholders after the payment of these taxes and liquidation costs, both this distribution and the previous distribution will qualify under subsection 88(2).

Timing of Distributions

2. To achieve the purpose of subsection 88(2), timing is of particular importance. The points in time specified and their significance are as follows:

(a) "A particular time in the course of winding-up" is that point

(i) when the final distribution of property is made,

(ii) when, by virtue of subsection 84(2), the corporation is deemed to have paid and the shareholders are deemed to have received a dividend referred to in paragraph 88(2)(b) as the "winding-up dividend", and

(iii) when an election is required under subsection 83(2), 133(7.1), or 83(2.1) as it read with respect to dividends paid after June 28, 1982 and before May 24, 1985, to pay tax-free dividends.

(b) The "time of computation" of the corporation's capital dividend account, capital gains dividend account and pre-1972 capital surplus on hand is immediately before the time mentioned in (a) above.

(c) "Immediately before the time of computation" is when the taxation year of the corporation is deemed to have ended and a new taxation year to have commenced. In conjunction with subparagraph 88(2)(a)(iv), this "time of computation" ensures that the capital dividend account, the capital gains dividend account and the pre-1972 capital surplus on hand include any amount arising on or prior to the final winding-up distribution.

d) "Immediately before the end of the taxation year" (the year deemed to have ended in (c) above) is when the property distributed at the particular time noted in (a) above is deemed to have been disposed of by the corporation. This permits the capital gains and other amounts arising on the distribution to be reflected in the accounts prior to the end of that taxation year.

Calculation of Separate Dividends

3. Paragraph 88(2)(b) provides that for the purpose of an election to pay

(a) a capital dividend under subsection 83(2),

(b) a capital gains dividend of a non-resident-owned investment corporation under subsection 133(7.1), or

(c) after June 28, 1982 and before May 24, 1985, a life insurance capital dividend under subsection 83(2.1), as it read for that period,

portions of the winding-up dividend are considered to be separate dividends. These separate dividends are calculated as follows:

(d) For an election under subsection 83(2) (or subsection 133(7.1)), a separate dividend is deemed to be paid equal to the portion of the winding-up dividend that does not exceed the balance of the capital dividend account (or capital gains dividend account) immediately before such dividend is deemed to have been paid. Where the winding-up dividend exceeds the balance of the capital dividend account (or capital gains dividend account), the separate dividend is always equal to that balance and therefore an election (if any) under subsection 83(2) (or 133(7.1)) must be in respect of that balance.

(e) With respect to a winding-up ending after June 28, 1982 and before May 24, 1985, the portion of the winding-up dividend that exceeds the amount elected under subsection 83(2) or 133(7.1) as determined in (d) above, up to the amount of the corporation's life insurance capital dividend account, is also deemed to be a separate dividend. Provided an election in respect of the full amount was made under subsection 83(2.1) as it read for that period, such separate dividend is a non-taxable dividend.

(f) The portion of the winding-up dividend that exceeds the amount of the dividends elected under subsection 83(2), 133(7.1) or, after June 28, 1982 and before May 24, 1985, subsection 83(2.1) as determined in (d) and (e) above, up to the corporation's pre-1972 capital surplus on hand is deemed not to be a dividend. This portion is included under subparagraph 54(h)(ix) in the proceeds of the disposition of the shares.

(g) The portion of the winding-up dividend that exceeds the aggregate of

(i) the separate dividend in (d) above (where an election is made),

(ii) the separate dividend in (e) above, and

(iii) the portion in (f) above

is deemed to be a separate dividend that is a taxable dividend.

Each shareholder is deemed to have received separate dividends, determined as in (d), (e), and (g) above in proportion to the number of shares held.

The separate components of the winding-up dividend, as discussed in (d) to (g) above, can be illustrated in the following table:

WINDING UP DIVIDEND
PRIVATE CORPORATION NON-RESIDENT OWNED INVESTMENT CORP. PUBLIC CORPORATION
(d), (e) 88(2)(b)(i)CAPITAL DIVIDENDOR LIFE INSURANCECAPITAL DIVIDEND (d) 133(7.1)CAPITAL GAINDIVIDEND  
(f)88(2)(b)(ii)PRE-1972CSOH (f)88(2)(b)(ii)PRE-1972CSOH (f)88(2)(b)(ii)PRE-1972CSOH
(g)88(2)(b)(iii)TAXABLEDIVIDEND (g)88(2)(b)(iii)TAXABLEDIVIDEND (g)88(2)(b)(iii)TAXABLEDIVIDEND

The example below illustrates the above allocation and ordering of the winding-up dividend for a private corporation.

The following facts are assumed regarding the wind-up of a private corporation:

Proceeds available on winding-up $5,000,000
Paid-up capital of shares 1,000,000
Balance in capital dividend account 1,300,000
Balance in pre-1972 capital surplus on hand 600,000

The application of paragraph 88(2)(b) is as follows:

Proceeds on winding-up 5,000,000
less: paid-up capital - paragraph 89(1)(c) 1,000,000
Winding-up dividend - paragraph 84(2)(b) 4,000,000
less: capital dividend account (election made) subparagraph 88(2)(b)(i) 1,300,000
  2,700,000
less: pre-1972 capital surplus on hand subparagraph 88(2)(b)(ii) 600,000
Taxable dividend - subparagraph 88(2)(b)(iii) $2,100,000

Assessment of Amounts

4. The amounts that are deemed to be separate dividends and the amount deemed not to be a dividend depend on the balance, as finally assessed by the Department, of

(a) the capital dividend account (or capital gains dividend account),

(b) the pre-1972 capital surplus on hand, and

(c) after June 28, 1982 and before May 24, 1985, the life insurance capital dividend account, immediately before the winding-up dividend is deemed to have been paid. Where balances of these accounts as assessed differ from the amounts computed by the corporation at the time of the elections under subsection 83(2), 83(2.1) (as it read at that time), or subsection 133(7.1) in respect of those separate dividends, the amount of each separate dividend and the related election will be adjusted to reflect the balances assessed.

However, the corporation remains responsible for computing these accounts as accurately as possible in light of all the facts available at the time of the election.

Note: If draft legislation released by the Minister of Finance on

February 18, 1991 is enacted into law as proposed, the provisions of subsection 88(2) will apply to the capital gains dividend account of investment corporations as described in paragraph 131(6)(b). It is proposed that for windings-up commencing after 1988, subsection 88(2) will apply to the capital gains dividend account of investment corporations in the same manner as it currently applies to the capital dividend account of private corporations and the capital gains dividend account of non-resident-owned investment corporations.

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