Section 184

CRA confirms that where a corporation has paid a capital dividend in Year 1 based on a capital gain realized by it in that year, a capital loss realized by it in Year 2 only affects the calculation of its capital dividend account going forward so that no Part III tax on the capital dividend is engaged.

Vendors may proceed with a preliminary reorganization before a share sale and agree in advance that an s. 184(3) election will be made in the event of it being identified that there has been an excessive capital dividend designation.

1. Will CRA accept an advance concurrence to the making of the election, where the shareholder concerned has no involvement when the election is made?
2. Are T5 slips required where the election is made?

CRA responded:

(a)

… In a context similar to that described in the statement of this question, the CRA generally accepts that shareholders may give their concurrence in advance, through undertakings under the various sale agreements, to the making of [the] election … .

(b)

…When a subsection 184(3) election is filed, additional T5 slips must usually be filed. However, since in such circumstances the number of shareholders is generally small and their respective returns have generally been assessed at the time the 184(3) election is filed, the CRA will not request the preparation of T5 slips in respect of that election unless the circumstances make that procedure practical.

However, if an excessive capital dividend is identified in the year it is paid or payable, the corporation will have to file additional T5 slips by the last day of February of the following year … .

The s. 184(3)(b) excess dividend election is made respecting the amount of the original dividend that was payable. S. 184(3)(d) deems the shareholder to have received the excess dividend. Does the excess portion of a dividend, that was declared but not paid and that was elected upon under s. 184(3), remain non-taxable to the shareholder for so long as it remains unpaid? CRA responded:

[U]nder the current wording of subparagraph 184(3)(d)(ii), as the separate taxable dividend is deemed, for the purposes of paragraph 12(1)(j) and subsection 82(1), to have been received at the time the initial dividend was payable, such dividend may be taxed in a taxation year preceding the year in which the dividend was actually paid.

The CRA has already brought this matter to the attention of the Department of Finance.

Where an excessive capital dividend is made outside the reassessment period, will s. 184(3) apply? After referring to the 90-day period in the preamble to s. 184(3), CRA stated:

Thus, it would be possible to make an election under subsection 184(3) if a notice of reassessment were issued provided that the prescribed terms and conditions were followed and provided that the corporation elected not later than the 90^th day on which the notice of reassessment was sent.

On the other hand, if the Minister could no longer assess under Part III, the condition for making an election under subsection 184(3) would not be satisfied given that the corporation would not have tax payable under Part III.

In 2011-0412071C6 F, CRA indicated that if the corporation informs the local Tax Services Office that it wishes s. 184(3) to apply, the TSO will apply the "short-cut” method under which no Part III assessment will be issued to the corporation and only the shareholders will be reassessed to include the taxable dividends in their income. Is the short-cut method generally available or only in exceptional circumstances? CRA responded:

This administrative practice is still in effect and the CRA is generally prepared to apply it to a file, both at the taxpayer's request and during an audit of an election under subsection 83(2). The use of this method, however, remains in the discretion of the CRA to determine whether the circumstances of a file are appropriate for its application.

Aco, which had a capital dividend account of $100, paid a dividend to its sole shareholder, Bco and elected for the dividend to be a capital dividend. Bco, in turn, paid a $100 dividend to its sole shareholder, Mr. X, and elected for the dividend to be a capital dividend. CRA disallowed the capital dividend paid by Aco under s. 83(2.1) and, as a consequence, assessed Bco for Part III tax.

Bco wishes to object to the Part III assessment, but at the same time preserve its ability to file an election under s. 184(3) (which must be filed within 90 days of the assessment) to treat the dividend as a taxable dividend in the event its objection is unsuccessful.

After referring to the position in 2007-0221211I7 that CRA was technically unable to defer the processing of an s. 184(3) election until the ultimate resolution of an objection to the Part III tax assessment, CRA stated:

This position has now been changed… . CRA is now generally accepting to hold in abeyance a subsection 184(3) election filed on a timely manner until the resolution of the objection and subsequent appeal to court, if any, of the Part III tax assessment. In the event that the taxpayer's objection (or subsequent appeal) is ultimately allowed, the subsection 184(3) election would be withdrawn and treated as if it had never been made. In the event that the taxpayer's objection (or subsequent appeal) is ultimately dismissed, the subsection 184(3) election would be treated as valid and having been made in a timely manner.

Where the directors declare a capital dividend and before the payment date for the dividend the corporation (which has individual shareholders) realizes a capital loss that causes the capital dividend account to be less than the amount of the capital dividend, the fact of there being an excessive capital dividend will not be solved by the corporation passing a further resolution, before the payment date, to split the dividend in two (given that the original dividend declaration continues to be valid). However, if the corporation informs the local Tax Services Office that it wishes s. 184(3) to apply, the TSO will apply the "short cut method" under which no Part III assessment will be issued to the corporation and only the shareholders will be reassessed to include the taxable dividends in their income.

After a corporation is assessed under s. 184(2) in respect of an excess dividend following an audit of the calculation of its capital dividend account, and rather than making the election within 90 days under s. 184(3) and convert the excess dividend into a taxable dividend, it files a notice of objection thereto, but is ultimately unsuccessful and the assessment previously made is maintained. Does this come within the statement in IC07-1 as to potential relief where “[t]here have been tax consequences not intended by the taxpayer, and there is evidence that the taxpayer took reasonable steps to comply with the law,” so that CRA could accept a late election under s. 220(3.2) to convert the excess dividend into a taxable dividend under s. 184(3)? CRA responded:

[T]he Minister is not required to provide … relief under subsections 220(3.1) and (3.2), and it is not the CRA's policy to automatically waive penalties or accept a request for an extension of time or a request to revoke an election by virtue of subsections 220(3).(1) and (3.2). …

[A]s a matter of first impression, it cannot be assumed that a request for an extension of time under subsection 220(3.2) to file an election under subsection 184(3) would necessarily be denied in a particular situation similar to the given hypothetical situation.

A private corporation (Aco), which had paid a capital dividend out of what it believed to be a capital dividend account balance generated by a property sale, was reassessed by CRA for Pt. I tax on the basis that the disposition was on income account, and also for Pt. III for the alleged excessive capital dividend. Aco suggested that upon filing its Notice of Objection to the Pt. I and III tax reassessments, Aco would file a s. 184(3) election but would request that CRA not deal with that election until the Court had ruled in CRA’s favour. In rejecting this suggestion, the Directorate stated:

[I]n order for the AB [Appeals Branch] with all due dispatch to conduct a review of the assessment of Pt. III tax under the Act and make a decision to either vacate, confirm or vary it by virtue of subsection 165(3), the review of the assessment must take into account the 184(3) Election filed by the corporation, that is, not only to determine the validity of that 184(3) Election but also, if applicable, to give immediate effect to it by cancelling the assessment of Pt. III tax payable by the corporation and the assessment of Pt. I tax payable by its shareholders for whom the 184(3) Election applies.

Thus, in the particular situation, for the reasons set out above, we are of the view that, technically, the ABSB should not suspend the processing of Aco's valid 184(3) Election but rather should proceed with it and, as a result, the AB should cancel the assessment of the Pt. III tax payable by Aco pursuant to subsection 165(3) and the ABSB should assess the Pt. I tax payable by the Aco shareholder to whom the 184(3) Election applies.

A private corporation (Aco), which had paid a capital dividend out of what it believed to be a capital dividend account balance generated by a property sale, was reassessed by CRA for Pt. I tax on the basis that the disposition was on income account, and also for Pt. III for the alleged excessive capital dividend. The Directorate rejected various procedural solutions suggested by Aco (which did not initially make a s. 184(3) election) for eliminating its Pt. III tax and generating a taxable dividend to Aco’s sole shareholder:

• Following the Court's dismissal of Aco's appeal, Aco would apply for an extension pursuant to s. 220(3.2) to file the s. 184(3) election, and CRA would undertake in advance to accept this request.
• Upon filing its Notice of Objection to the Pt. I and III tax reassessments, Aco would file a s. 184(3) election but would request that CRA not deal with that election until the Court had ruled in CRA’s favour.
• Aco would only file a Notice of Objection respecting the Pt. I tax reassessment ­­and a s. 184(3) election, with the sole shareholder timely objecting to the Notice of Assessment received, but with CRA agreeing to deal with the shareholder's Notice of Objection only after Aco's Notice of Objection had been finally resolved, and with the shareholder deferring payment of the assessed tax until the objection was resolved.
• Aco would only file a Notice of Objection respecting the Pt. I tax reassessment ­­and a s. 184(3) election, with the sole shareholder, rather than objecting to the Notice of Assessment received, providing CRA with a waiver to allow CRA to reverse the taxable dividend once Aco succeeded in court, with CRA agreeing to so reassess in such event.

Subco declared a dividend payable to its parent (Parentco) which, in turn, declared a corresponding dividend to its individual shareholder (Mr. A), with a s. 83(2) election being made in both cases. After finding that such dividends were not paid since there were only accounting entries to accomplish the payments, the Directorate noted that there nonetheless was Part III tax payable because valid s. 83(2) elections had been made, and that the s. 184(3) election was unavailable because:

[I]n order for Mr. A to be taxed on the deemed separate taxable dividend pursuant to paragraph 184(3)(c), he must have received the dividend in question. As noted above, the mere making of the accounting entries … does not in itself constitute the payment by Parentco and receipt by Mr. A of a dividend … .

Xco filed a s. 83(2) election in 2001, whose amount was excessive due to an amount in fact not having been an addition to its capital dividend account. No notice of assessment was made under Part III, nor was any notification that no Part III tax was payable ever issued.

The Directorate indicated that Xco should first be assessed for Part III tax respecting its 2001 taxation year, and that if Xco elects under s. 184(3), CRA should then assess the shareholders for the resulting taxable dividends under s. 184(3)(d), which it would be permitted to do by s. 184(4)(b)(ii) notwithstanding the normal reassessment period.

After a corporation paid a capital dividend to its two shareholders and before CRA assessed to reduce the corporation’s capital dividend account, one of the two shareholders (“SC”) was dissolved. Would the corporation be permitted as an administrative matter to make the s. 184(3) election, notwithstanding such dissolution? CRA responded:

[T]echnically, the Corporation could not make the subsection 184(3) election. Furthermore, if SC were a "cooperative corporation", as defined in subsection 136(2), our view would be the same.

Furthermore, we do not intend to propose to the Department of Finance that the conditions for making an election by virtue of subsection 184(3) be changed, since there is a valid legislative alternative … . In such a situation, a corporation may apply to the Minister by virtue of subsection 220(3.2) to revoke its election under subsection 83(2) in respect of the dividend it has paid.