Under the Income Tax Act (“the Act”) a “capital dividend” (“CD”) paid by Canadian resident corporation is not included in the income of a recipient shareholder. A CD is an actual or deemed dividend paid with respect to which a specified election in prescribed form has been filed by the paying corporation. A CD may be paid by a private corporation. However, if an amount paid exceeds its “capital dividend account” (“CDA”) on hand at the relevant time a penalty will apply. In general terms, the CDA can consist of amounts derived from the following:
- CD’s received from other corporations
- Life insurance proceeds, and
- The non-taxable portion of capital gains, in excess of the non-allowable portion of capital losses.
- Subsections 83(2.2) to 83(2.4) provide exclusions from the application of subsection 83(2.1) for most situations, other than those where the CDA relates to a period where the relevant corporation was controlled by non-residents, and
- Statements issued by the CRA, suggest that it is their administrative policy that subsection 83(2.1) should not be applied where existing shareholders exchange their shares for another class. Or, to put it another way, it is the purpose of the acquisition of the original shares which should govern.