Subsection 184(2) - Tax on excessive elections
Administrative Policy
IT-66R6 "Capital Dividends"
Subsection 184(3) - Election to treat excess as separate dividend
Administrative Policy
4 December 2013 T.I. 2013-0504951E5 - Objection Part III Tax -184(3) Election
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that the taxpayer's objection (or subsequent appeal) is ultimately allowed, the subsection 184(3) election would be withdrawn and treated as if it had never been made.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.
2011 APFF Roundtable Q. 4, 2011-0412071C6 F
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.
May 1999 CALU Conference No. 9908430, Q. 2
As s. 184(3) only deals with the excess of the full amount of a dividend over the capital dividend account, there is no scope for the Department to accept an election on a larger amount.
IT-66R6 "Capital Dividends"
Subsection 184(3.1)
Cases
Special Risks Holdings Inc. v. The Queen, 88 DTC 6444 (FCTD), aff'd 89 DTC 5039 (FCA)
After being assessed for Part III tax, the taxpayer made an election under s. 184(3.1) on the understanding, shared by MNR, that the provision would have no operative effect pending a final determination of the issue between the taxpayer and MNR as to the taxpayer's liability under Part III. The Federal Court had jurisdiction under s. 18 of the Federal Court Act to consider a request by the taxpayer, following the final adverse disposition of its appeal from the assessment by the Court of Appeal, to obtain a refund of tax on the basis of the election. The s. 184(3.1) issue was entirely separate because it could not have been raised until the assessment issue was decided. There also was an arguable case that s. 184(3.1) was a remedial section which applies even to assessments which are final and binding. In the Court of Appeal, Marceau J. indicated that s. 184(3.1) was meant to benefit corporations bound by final assessments, regardless whether the assessments were valid because of a court judgment or as a result of the passage of time.