Consider the situation where subsection 55(2) applies to a dividend because it is paid as part of a series that includes the refund of the Part IV tax that was payable on the dividend. Ottawa Air Cargo Centre Ltd. v R, 2008 FCA 54, aff’g 2007 TCC 193, requires the recipient to follow a two-step process: the recipient must file a return that reports the Part IV tax and the refund, and then, when that return is assessed, the recipient must file an amended return to report the deemed capital gain under subsection 55(2).
Some practitioners believe that a capital dividend cannot be paid in respect of of the deemed gain until after the year in which the gain is reported. The CRA has stated that the recipient cannot treat any portion of the dividend that resulted in the refund of Part IV tax as a capital dividend because that would reduce the refund, which would reduce the portion of the gain subject to 55(2) and so on (ie it would result in a circular calculation). Perhaps, however, the recipient can pay a separate capital dividend in the same year (“funded from another source of corporate equity”).
What if the recipient pays a dividend that refunds Part IV tax years later, after the expiry of the normal reassessment period for the year in which the tax was paid? Can the earlier year be re-opened to apply subsection 55(2)?
What happens if a corporation’s RDTOH balance derives from multiple sources? The Income Tax Act (Canada) does not contain an ordering rule to deem Part IV to have been refunded before or after the refund of other taxes that make up the balance.
The normal reassessment period under Part III starts to run only if an assessment under the Part is issued, which normally does not happen. In theory, this means that the CRA could re-visit the capital gains realized in any year, decide that some of them were really income gains and then potentially assess Part III tax for any subsequent capital dividend, even if it was paid in a barred year. The CRA might not be able to reassess Part I tax in respect of the impugned capital gains, but the years are likely not barred for the purposes of Part III.
Bal Katlai and Hugh Neilson “Section 55 and Part IV Tax: Uncertainties Abound” Tax for the Owner-Manager 23:2 (April 2023)
