Chapter History S3-F2-C1, Capital Dividends

Introduction

The purpose of a Chapter History page is to highlight any amendments to the information contained in a chapter of an income tax folio, including amendments to the information originally contained in an interpretation bulletin that has been cancelled and replaced with a folio chapter. It outlines amendments that have been made as a result of legislative changes and proposed legislative changes, precedential court decisions, as well as new or revised interpretations of the Canada Revenue Agency (CRA).

Except as otherwise noted, all statutory references herein are references to provisions of the Income Tax Act, R.S.C., 1985, c.1 (5th Supp.), as amended and all references to a Regulation are to the Income Tax Regulations, C.R.C., c. 945, as amended.

Update July 25, 2019

¶1.6 has been revised to remove the unnecessary word “account” from “CDA account” in the first sentence.

¶1.29 to 1.31 have been revised and renumbered to reflect comments made by the CRA at the round tables of the 2017 and 2018 Canadian Tax Foundation annual national conferences regarding the treatment of certain dividends subject to subsection 55(2) in the calculation of the CDA. The specific changes are described below.

¶1.29 has been revised to indicate that the statements are subject to the comments in ¶1.30 and 1.30.1. The following sentence (formerly in ¶1.31) has been added to the end of the paragraph, with slight modifications: “The denied increase in cost under those previously-mentioned provisions is included in the cost or adjusted cost base of the particular share(s) solely for the purpose of calculating a capital gain or capital loss to determine the amount, if any, to be added to the corporation’s CDA.”

¶1.30 has been revised to describe, in respect of a dividend on a share that results from an increase in paid-up capital, the manner in which subparagraph 53(1)(b)(ii) is applied in the calculation of the cost of the share, depending on whether the dividend is subject to the application of subsection 55(2).

¶1.30.1 is new and has been added to describe the manner in which subclause 52(3)(a)(ii)(A)(II) is applied to determine the cost of a stock dividend share for the purpose of calculating the amount, if any, to be added to a corporation’s CDA, depending on whether the stock dividend was subject to the application of subsection 55(2).

¶1.31 has been revised to delete the final sentence, which read as follows: “However, the denied addition is included in the cost of the particular share(s) solely for the purpose of calculating a capital gain or capital loss to determine the amount, if any, to be added to the corporation’s CDA.” The sentence has been moved, with slight modifications, to ¶1.29.

¶1.31.1 has been added to describe the timing of inclusion in the CDA of an amount deemed to be a capital gain under paragraph 55(2)(c), as expressed by the CRA at the 2017 Canadian Tax Foundation conference.

¶1.43.1 and 1.43.2 are new paragraphs that have been added to reflect the addition of subparagraph (a)(i.1) to the definition of capital dividend account in subsection 89(1) by S.C. 2017, c. 33, s. 26(2), effective December 14, 2017, with ¶1.43.1 applicable for distributions from a trust after September 15, 2016 and ¶1.43.2 applicable for distributions from a trust on or before that date.

¶1.50 to 1.58 have been revised to reflect the repeal of the provisions concerning the eligible capital property regime and the addition of Class 14.1 depreciable property to Schedule II to the Regulations and subsection 13(35). These changes were made by S.C. 2016, c.12, (formerly Bill C-29), which came into force or is deemed to have come into force on January 1, 2017. The specific changes are described below.

¶1.50 now describes the legislative change that repealed the eligible capital property regime. The following statement has been deleted from ¶1.50 and is now in ¶1.50.2: “Paragraphs (c), (c.1) and (c.2) of the definition of CDA effectively include in that account the notional non-taxable portion of gains resulting from the disposition of eligible capital property in respect of each business of the corporation.” The reference to Interpretation Bulletin IT‑123R6, Transactions Involving Eligible Capital Property has been deleted entirely.

¶1.50.1 is a new paragraph added to introduce the discussion of Component 3 of the CDA in ¶1.50.2 to 1.58, which comments are generally relevant to tax years ending before January 1, 2017.

¶1.50.2 as mentioned, contains a statement formerly included in ¶1.50.

¶1.52 has been revised to refer to Component 3, for clarity and to use the word “former” with reference to subsection 20(4.3).

¶1.53 has been revised to provide clarifying wording about the repeal of the eligible capital property regime.

¶1.54 has been revised to state the comments apply to tax years ending after February 27, 2000 and before January 1, 2017. A sentence has been added at the end of the paragraph to describe a transitional rule that allowed an election under subparagraph 13(38)(d)(iii).

¶1.55 has been revised to use the word “former” with reference to paragraph 14(1)(b). As well, the phrase “ rather than the corporation’s tax year-end” has been added at the end of the sentence for clarity. 

¶1.56 to 1.58 have been revised to refer to “former” subsection 14(1.01) throughout and to make similar changes to the wording to reflect the repeal of the provisions in question.

¶1.59 has been revised to include a reference to Component 4 for clarity.

¶1.60 has been revised to reflect changes to paragraph (d) of the definition of capital dividend account in subsection 89(1) by S.C. 2016, c. 12, effective December 15, 2016. Minor changes have also been made to improve readability.

¶1.60.1 is a new paragraph that has been added to provide commentary on subparagraph (d)(iii) of the definition of CDA.

¶1.60.2 is a new paragraph that has been added to provide commentary on subparagraph (d)(iv) of the definition of CDA. The discussion of 10/8 policies that was previously included in ¶1.64 now appears in ¶1.60.2.

¶1.60.3 is a new paragraph that has been added to provide commentary on subparagraphs (d)(v) and (d)(vi) of the definition of CDA. 

¶1.60.4 and 1.60.5 are new paragraphs that have been added to describe adjustments to an amount otherwise added to the CDA that may occur when all conditions described in ¶1.60.3 are met.

¶1.64 has been deleted. The discussion of 10/8 policies that was in this paragraph has been moved to ¶1.60.2.

¶1.73 has been deleted as a result of the changes to paragraph (f) to the definition of the capital dividend account in subsection 89(1) made by S.C. 2017, c. 33, s. 26(3), effective December 14, 2017. A description of the treatment of trust distributions is now in ¶1.43.1.

¶1.75 has been revised to remove the reference to amounts referred to in ¶1.73, which paragraph has been deleted.

Example 4 has been revised to refer to amounts that are payable rather than to payments, in order to be consistent with the wording of the subheading preceding ¶1.76, under which Example 4 appears.

The Reference section has been updated to refer to several additional statutory provisions referenced in the Chapter.

In addition, minor revisions have been made to the French version of the Chapter for readability purposes.

The Chapter History The update from December 16, 2016, which describes changes made to ¶1.86 to 1.89 has been revised in the second sentence to add the word “solidary” to the description of the liability.

Update December 16, 2016

General

Income Tax Folio S3-F2-C1, Capital Dividends, replaces and cancels Interpretation Bulletin IT-66R6, Capital Dividends.

In addition to consolidating the content of the former interpretation bulletin, general revisions have been made to improve readability. Any substantive technical and interpretive changes to the information outlined in the former interpretation bulletin are described below.

Legislative and other changes

¶1.17 (formerly in ¶1 of IT-66R6) has been expanded to refer to subsections 112(3), (3.1), (3.2) and (3.3) and to refer to Schedule 89 (Form T2SCH89, Request for Capital Dividend Account Balance Verification).

¶1.20 is a new paragraph that describes when a person must be a shareholder of a corporation to be entitled to a capital dividend.

¶1.22 (formerly in ¶4 of IT-66R6) has been reworded to correct the description of the formula for calculation of the penalty to accompany a late-filed election.

¶1.26 clarifies the date, previously described in ¶6 of IT-66R6, when the period referred to in ¶1.11 begins.

¶1.27 to 1.35 revise the description of the calculation of the component of the capital dividend account that takes account of capital gains and capital losses realized by a taxpayer.

¶1.36 (formerly ¶8 of IT-66R6) has been revised to delete, as unnecessary for reproduction in the Chapter, the description of the specific properties that are included in the definition of “designated property” in subsection 89(1).

¶1.37 (formerly ¶9 of IT-66R6) has been revised, in accordance with the Note to that ¶9 and pursuant to S.C. 1994, c. 7, Sch. II, s. 67(1), to remove the exception for designated property from amounts described in that paragraph that are excluded from a corporation’s capital dividend account.

¶1.38 is a new paragraph to comment, in relation to the capital dividend account, on the treatment of a capital gain deemed to be realized as a result of a forgiveness of the debt of a corporation.

¶1.39 is a new paragraph to comment, in relation to the capital dividend account, on the treatment of gains forming part of a corporation’s foreign accrual property income.

¶1.40 and 1.41 (formerly addressed in ¶11 of IT-66R6) expand the description of the effect on the capital dividend account of reserves claimed under subparagraph 40(1)(a)(iii).

¶1.42 and 1.43 are new paragraphs that describe the treatment of certain amounts earned or realized by a partnership in relation to a corporate partner’s capital dividend account.

¶1.44 is a new paragraph to highlight that net capital losses that, pursuant to subsection 111(4), are not deductible because of an acquisition of control will still reduce the capital gain component of the corporation’s CDA.

¶1.48 and 1.49 are new paragraphs that describe when capital dividends received by a partnership will be included in the capital dividend accounts of its corporate partners.

¶1.50 is preceded by a new paragraph that gives notice of a proposed legislative change contained in Bill C-29, Budget Implementation Act, 2016, No. 2, in respect of measures in the March 22, 2016 federal budget, that will reclassify eligible capital property as depreciable property effective January 1, 2017.

¶1.50 to 1.58 have been added to revise the description of the calculation of the component of the capital dividend account that takes account of gains and losses realized in connection with the disposition of eligible capital property.

¶1.59 to 1.72 have been added to describe the treatment of proceeds of life insurance policies in relation to the capital dividend account. The paragraphs reflect legislative changes made by S.C. 2013, c. 40, s. 41(1) and describe the exception made for amounts received as proceeds of a leveraged insurance annuity policy (an LIA policy) and the reduction to the capital dividend account in respect of a 10/8 policy. The paragraphs also describe the treatment of life insurance proceeds received in connection with policies used as security for debt and takes account of the 2010 Federal Court of Appeal decision in Canada v. Innovative Installation Inc., 2010 FCA 285, 2010 DTC 5175 aff’g. 2009 TCC 580, 2009 DTC 1388 (TCC)).

A new paragraph also gives notice of proposed legislative changes contained in Bill C-29, Budget Implementation Act, 2016, No. 2, in respect of measures in the March 22, 2016 federal budget, that will limit or reduce the amount that, in respect of the receipt of life insurance proceeds, may be added to the CDA and to the adjusted cost base of an interest in a partnership.

¶1.73 to 1.75 are new paragraphs that describe the treatment of the capital dividend account of a beneficiary of a trust in relation to amounts earned or realized by a trust, as introduced by S.C. 2001, c. 17, s. 67(3).

A new paragraph also gives notice of a proposed legislative change contained in draft legislation released September 16, 2016 respecting the treatment of the non-taxable portion of capital gains realized by a trust that may be added to a corporate beneficiary’s CDA.

¶1.77 is a new paragraph that describes and illustrates the manner in which capital dividends paid by a corporation may delay the payment of future capital dividends.

¶1.79 and 1.80 (formerly ¶7 of IT-66R6) have been revised as a result of a change to paragraph 87(2)(z.1), pursuant to S.C. 1994, c. 7, Sch. II, s. 65(7), to deem the new corporation to be the same corporation as, and a continuation of, each predecessor corporation. A numerical example of the application of this provision is also given.

¶1.82 is a new paragraph to describe a special capital dividend election that is available for a winding-up dividend pursuant to subparagraph 88(2)(b)(i).

¶1.84 is a new paragraph that describes when a dividend deemed to be paid pursuant to subsection 84.1(1) may be treated as a capital dividend.

¶1.86 to 1.89 (formerly ¶17 of IT-66R6) have been revised, pursuant to S.C. 2013, c. 34, s. 327(1) to describe the applicable tax rate in subsection 184(2). They also describe the joint and several, or solidary, liability of the recipients of a dividend for Part III tax that was added by S.C. 1994, c. 7, Sch. II, s. 153(1) and amended by S.C. 2013, c. 34, s. 150(1).

¶1.91 (formerly ¶18 of IT-66R6) has been revised to change the description of the time when, and the circumstances in which, an election may be made for the purposes of subsection 184(3) due to changes contained in S.C. 1994, c. 7, Sch. II, s. 152(1) and in S.C. 2013, c. 34, s. 327(1).

¶1.92 (formerly ¶19 of IT-66R6) revises the description of the time when a shareholder is deemed to receive each separate dividend referred to in subsection 184(3) from the date of receipt of the dividend to the date that each separate dividend became payable, due to changes contained in S.C. 2013, c. 34, s. 327(1).

¶1.93 is a new paragraph that describes an administrative policy of the CRA that may allow a corporation to object to an assessment of Part III tax while, at the same time, making an election for the purposes of subsection 184(3).

¶1.95 is a new paragraph to address the 2013 Federal Court of Appeal decision in Groupe Honco Inc. v. Canada, 2013 FCA 128, 2014 DTC 5006 (FCA), aff’g. 2012 TCC 305, 2013 DTC 1032 (TCC).