A corporation may add the non-taxable portion of realized capital gains to its capital dividend account and distribute those amounts tax-free to its Canadian resident shareholders. Based on the government’s budget announcement in April, it seemed to be widely accepted that 50 per cent of capital gains realized before June 25 should be added to a corporation’s capital dividend account and 1/3rd should be added after June 24. This seemed to be a logical application of the rules and consistent with the government’s messaging on capital gains realized before June 25.
Draft legislation released on June 10, 2024 suggests otherwise and indicates the addition to a corporation’s capital dividend account should be based on an average inclusion rate for all capital gains realized by a corporation in its taxation year straddling June 25. Adverse issues include the following: (i) the capital dividend account before June 25 may be less than expected, (ii) capital dividends paid out before these new rules were announced may have exceeded the capital dividend account, and (iii) it may be risky to pay out the capital dividend account now because the average rate cannot be certain until the end of the year.
Averaging may have been unintended by the drafters of the legislation. In response to at least one inquiry from the tax community, we understand the Department of Finance is aware of this issue and has offered the following statement:
“I can confirm this concern with the computation of CDA during the transition year is under active consideration to be addressed in the next version of the proposed legislative amendments.”
We are hopeful this issue will be addressed in the next release of draft legislation. We will continue to monitor developments on this important issue.
Glen MacMillan, Tax Partner
Please contact your A+M partner if you have any questions about the 2024 Federal Budget announcements or any other matter.
The above content is not complete, does not address all scenarios and is intended for general information purposes only. This memo should not be used or relied on as a substitute for consultation with your Adams + Miles professional advisor.
