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Federal Tax - Dividends. Magren Holdings Ltd v. Canada
In Magren Holdings Ltd v. Canada (Fed CA, 2024) the Federal Court of Appeal dismissed a appeal, this from a dismissed Tax Court appeal, this from a Ministerial assessment "imposing tax on the basis that all of the capital dividends those corporations paid in 2006 were excess dividends", and "where a corporation pays a capital dividend in excess of the balance of its capital dividend account, the corporation is liable for tax".
Here the court considers aspects of capital dividend administration:[11] Only 50 percent of a capital gain realized by a taxpayer — the taxable capital gain — must be included in income for tax purposes. Where the taxpayer has a capital loss, 50 percent of that loss — the allowable capital loss — is deductible against taxable capital gains, but is not otherwise deductible in computing income.
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(2) The capital dividend account
[20] The capital dividend account (CDA) is an important part of what is typically referred to as the integration system in the Income Tax Act. Broadly speaking, the system’s goal is to tax income at the same rate whether earned directly by an individual or by a private corporation of which the individual is a shareholder. To do this, the system integrates—or combines—the taxes paid by the corporation and by the individual shareholder on a dividend of the corporation’s after-tax income to so that they roughly equal the tax the individual would pay had they earned the income directly. The system does this through different mechanisms, of which the CDA is one.
[21] The CDA is a notional account in which a private corporation tracks certain tax-free surpluses that it accumulates over time. A corporation’s CDA balance at a particular time is determined by adding and subtracting specified amounts that have arisen before that time. Two additions related to the non-taxable portion of a capital gain, albeit from different sources, are relevant here. They are:The positive difference between the non-taxable portion of all capital gains and the non-deductible portion of all capital losses that the corporation has had from dispositions of property before the calculation time: see paragraph (a) of the definition of CDA in s. 89(1); and
The non-taxable portion of any capital gain that a trust distributes to the corporation, as a beneficiary of the trust, before the calculation time: paragraph (f) of the definition of CDA in s. 89(1). [22] Notably, capital losses the corporation realizes are relevant only to the first CDA addition—that in paragraph (a). If, at the CDA calculation time, a corporation’s cumulative capital losses exceed its cumulative capital gains from dispositions of property, there is no positive amount described in paragraph (a). The resulting deficit precludes any addition to the CDA under paragraph (a) until the corporation realizes sufficient capital gains to eliminate it (i.e., until the corporation has an excess of cumulative capital gains over cumulative capital losses). However, that deficit has no other effect on the corporation’s CDA, including on the addition under paragraph (f) of the definition. This is of particular significance to this appeal.
[23] Where a trust pays an amount equal to its capital gain to the corporation (beneficiary), designating 50 percent of the payment as a taxable capital gain, the corporation adds the other (non-taxable) 50 percent to its CDA under paragraph (f) without regard to any capital losses previously realized by the corporation.
[24] When a corporation has a positive CDA balance, it may pay a capital dividend to its shareholders by making an appropriate election: s. 83(2). Capital dividends paid reduce the corporation’s CDA but are not taxable to the recipient: closing words of the CDA definition and paragraph (a) of the definition of taxable dividend in s. 89(1), 82(1). If the recipient is a private corporation, the capital dividends are added to its CDA: paragraph (b) of the CDA definition in s. 89(1).
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