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Disposal – the sale or exchange for other Real Property of any of the City’s Real Property that has been declared surplus, but does not include the leasing of City-owned property or the granting of an easement or right-of-way.
- Overview
- Summary
- Table of contents
- Discussion and interpretation
- Application
- Reference
This Chapter discusses capital dividends and the capital dividend account (CDA). The CDA keeps track of various tax-free surpluses accumulated by a private corporation. These surpluses may be distributed tax-free in the form of capital dividends to the corporation’s Canadian-resident shareholders. A corporation paying a capital dividend must file an election in respect of the dividend when the dividend is paid or becomes payable (capital dividend election). In certain circumstances, a late-filed election is acceptable (late-filed capital dividend election). If the corporation pays a capital dividend which exceeds the balance in its CDA, there will be additional tax consequences.
As the CDA is a cumulative account it may include amounts from other tax years when the provisions of the Act regarding the CDA were different than today. Except where otherwise specifically noted, the commentary in this Chapter is based on the law as it is currently written. In order to determine the amount included in the CDA in an earlier tax year, reference should be made to the law applicable to that year.
The Canada Revenue Agency (CRA) issues income tax folios to provide a summary of technical interpretations and positions regarding certain provisions contained in income tax law. Due to their technical nature, folios are used primarily by tax specialists and other individuals who have an interest in tax matters. While each paragraph in a chapter of a folio may relate to provisions of the law in force at the time it was written (see the Application section), the information provided is not a substitute for the law. The reader should, therefore, consider the chapter’s information in light of the relevant provisions of the law in force for the particular tax year being considered.
The CRA may have published additional guidance and detailed filing instructions on matters discussed in this Chapter. See the CRA Forms and publications webpage for this information and other topics that may be of interest.
•Discussion and interpretation
•Overview of the capital dividend account
•Capital dividend account – private corporation qualification
•Capital dividend account – election
•Election under subsection 83(2) and its effects
•Late-filed elections
Overview of the capital dividend account
1.1 This section will give the reader an overview and general description of the capital dividend account (CDA) and the mechanism to pay tax-free dividends from that account. It is not intended as a substitute for the more detailed and comprehensive discussion that follows it, which will be primarily of interest to tax specialists and other persons who may be responsible for calculating the CDA balance. 1.2 Certain dividends, called capital dividends, may be paid tax-free by private corporations to their Canadian-resident shareholders. This means that no part of the dividend is included in computing the shareholder’s income. 1.3 A capital dividend is paid from a private corporation’s CDA, which is an account that tracks various tax-free amounts that have been accumulated by the corporation. 1.4 The most common tax-free amounts included in the corporation’s CDA are: the tax-free portion of capital gains realized by the corporation to the extent they exceed the non-deductible portion of the corporation’s capital losses; life insurance proceeds on certain policies; and capital dividends received from other corporations. 1.5 Because the CDA is a running balance account, capital dividends paid by the corporation will reduce the account balance. 1.6 Where corporations are combined, components of each predecessor corporation’s CDA may be carried over to the surviving corporation. A combination of corporations could occur by amalgamation, merger or a winding-up of a subsidiary corporation into its parent corporation. Capital dividends may also flow through partnerships to their partners and through trusts to their beneficiaries. 1.7 For a corporation to pay a capital dividend, it must make an election to designate the entire amount of the dividend to be a capital dividend. 1.8 The election is made by completing and filing Form T2054, Election for a Capital Dividend Under Subsection 83(2) with the CRA by the election due date. This date is the day on which the dividend becomes payable (or the day any part of the dividend is paid, if that takes place earlier). Certain additional documents must be filed with the election, including a schedule showing the calculation of the CDA balance immediately before the election. Schedule 89 (Form T2SCH89, Request for Capital Dividend Account Balance Verification) may be used for the purpose of making this calculation. 1.9 If the election is not filed by the election due date, it can still be filed late, together with payment of a late-filing penalty. 1.10 If the amount elected to be a capital dividend exceeds the corporation’s CDA balance (called an excessive election), only the amount that equals the CDA balance will be a capital dividend. 1.11 Although no part of the excess amount will be included in the income of a recipient shareholder resident in Canada, the corporation itself will be subject to an additional tax (called the Part III tax) that is 60% of the excess amount plus interest until the date of payment. Each person who received any portion of the dividend will be jointly and severally, or solidarily, liable with the corporation for the person’s proportionate share of the Part III tax and interest. 1.12 An election is available to avoid the Part III tax. In that case, the excess portion of the dividend will be treated as an ordinary taxable dividend in the hands of the recipient shareholders who are then responsible for any resulting additional tax and interest. However, the election can generally be made only if there is agreement from all the shareholders who were entitled to any portion of the original dividend. 1.13 Anti-avoidance rules may apply if transactions are structured to obtain a capital dividend. If these rules apply, the dividend will usually be treated as a taxable dividend, rather than as a capital dividend.
Capital dividend account – private corporation qualification
1.14 A corporation that is a private corporation (defined in subsection 89(1)) may elect to pay its shareholders a capital dividend from its CDA pursuant to subsection 83(2). 1.15 A capital dividend may not be paid by a public corporation, even if it had previously been a private corporation and had a balance in its CDA immediately before it became a public corporation. 1.16 Amounts are added to and deducted from a corporation’s CDA only during the period described in ¶1.26. However, certain changes in a corporation’s status will cause the corporation to lose its entire CDA balance: if a private corporation that, at any time, had been controlled directly or indirectly in any manner whatever (see subsection 256(5.1)) by one or more non-resident persons becomes a Canadian-controlled private corporation (CCPC) at a particular time after March 31, 1977, otherwise than because of a change in the residence of one or more of the corporation’s shareholders, the CDA balance of the corporation will be reduced to nil immediately before the particular time (see subsection 89(1.1)) if at any time after November 26, 1987, a corporation that was exempt from tax under Part I of the Act ceases to be exempt from tax, the CDA balance of the corporation will be reduced to nil immediately after that time (see subsection 89(1.2)). ¶1.37 describes similar conditions that restrict amounts that may be added to the CDA.
Capital dividend account – election
Election under subsection 83(2) and its effects 1.17 Pursuant to subsection 83(2), an election to pay a capital dividend is to be made in the prescribed form and manner. Specifically, the prescribed form is Form T2054 and section 2101 of the Regulations describes the documents that are required to be filed with the election, including a certified copy of a resolution of the directors, or of an authorization of a person or persons legally entitled to administer the affairs of the corporation, to make the election and a schedule showing the computation of the amount of the CDA immediately before the election. Schedule 89 (Form T2SCH89), may be used for the purpose of making this calculation. The election must be made in respect of the full amount of the dividend that is to be paid. Subject to exceptions described in ¶1.90 to 1.92, no part of the elected dividend is included in computing Part I income of a shareholder resident in Canada. Also, no amount is deducted in computing the adjusted cost base of the shares on which the dividend is paid. However, the receipt of a dividend on a share in respect of which an election was made under subsection 83(2) may reduce a loss on the disposition of the share. In this regard, reference may be made to subsections 112(3), (3.1), (3.2) and (3.3). 1.18 Capital dividends paid to non-residents are subject to non-resident withholding tax of 25% under subsection 212(2). The withholding tax rate may be reduced if the dividend is paid to a person that is resident in a country that has a tax treaty with Canada. 1.19 An election to pay a capital dividend should be filed on Form T2054 by the earlier of: the day on which the dividend becomes payable; and the first day on which any part of the dividend is paid. For this purpose, a dividend becomes payable on the day stipulated by the resolution of the directors of the corporation declaring the dividend. Because an election must be made on the full amount of the dividend, this means it may not specify that the dividend is payable partly from the corporation’s CDA and partly from another source. 1.20 The definition of shareholder in subsection 248(1) includes a “person entitled to receive payment of a dividend”. This could be relevant where a dividend, in respect of which an election is to be made under subsection 83(2), is declared to be payable by a corporation on a particular payment date to shareholders of record at the end of an earlier specified date. Provided the corporation elects to have the provisions of subsection 83(2) apply to the full amount of the dividend, a person that was a shareholder of record at the end of the earlier specified date will be entitled to the treatment given to a dividend to which subsection 83(2) applies even if they no longer own the share(s) on the date of payment. Example 1 On Day 1 a corporation declares a dividend payable on Day 4 to all shareholders of record at the end of Day 2. Marc owns shares of the corporation at the end of Day 2 and disposes of those shares on Day 3. On Day 4 he does not own any shares of the corporation. On Day 4, when the corporation’s CDA balance is greater than the full amount of the dividend, the corporation files Form T2054 to elect that the full amount of the dividend is a capital dividend and pays the dividend to Marc. Although Marc does not own any shares of the corporation on Day 4 when the dividend is paid, Marc will be considered to have received a capital dividend. Late-filed elections 1.21 Subject to the comments in ¶1.23, subsection 83(3) and Regulation 2101(e) permit making a late-filed capital dividend election that would otherwise qualify as a valid election if filed as required by ¶1.19, provided that: the election is made in the prescribed form and manner (see ¶1.17); the estimated late filing penalty for the election is paid when the election is made; and the directors or other person or persons legally entitled to administer the affairs of the corporation have, before the time the election is made, authorized the election to be made. 1.22 The estimated late filing penalty is calculated as follows: the lesser of $41.67 or 1/12 of 1% of the amount of the dividend multiplied by the number of months and part-months between the filing due date described in ¶1.19 and the actual date the election is filed. 1.23 The late filing provisions described in ¶1.21 cease to be available for a particular dividend if a taxpayer does not comply with a written request from the Minister to make a late-filed election for that dividend within 90 days from the date of service of the request.
This updated chapter, which may be referenced as S3-F2-C1, is effective July 25, 2019.
When it was first published on December 16, 2016, this Chapter replaced and cancelled Interpretation Bulletin IT-66R6, Capital Dividends.
The history of updates to this Chapter as well as any technical updates from the cancelled interpretation bulletin can be viewed in the Chapter History page.
Except as otherwise noted, all statutory references herein are references to the 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.
Links to jurisprudence are provided through CanLII.
Income tax folios are available in electronic format only.
Sections 184 and 185, subsections 83(2) to (5), the definitions of capital dividend account, designated property and private corporation in subsection 89(1), subsections 89(1.1), 89(1.2) and 212(2), sections 2101 and 2106 of the Regulations and Form T2054 (also sections 13, 34.2, 54 and 215, subsections 14(1.01) and (1.02), 20(4.2) and (4.3), 40(3....
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What happens to surplus funds if I don’t claim them? If not claimed within a specified period, surplus funds might be transferred to the state’s unclaimed funds department. It’s essential to check with local regulations and claim the funds within the stipulated time frame.
Selling your rental property. If you sell a rental property for more than it cost, you may have a capital gain. List the dispositions of all your rental properties on Schedule 3, Capital Gains (or Losses). For more information on how to calculate your taxable capital gain, see Guide T4037, Capital Gains.
Once the property has been vested (title of the property has been transferred to the Town), they have to go to Council and declare the property as “surplus”. Once that is done they can offer the property for sale.
People also ask
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Aug 15, 2019 · Condos. Rules on surplus funds designed to protect owners. A resolution that reallocates a special levy surplus does not meet the requirements of the act and your strata corporation is exposing...
