Canada: Income Tax Folio on capital dividends published

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The Canada Revenue Agency (CRA) has published an Income Tax Folio on 15th December 2016 regarding capital dividends (S3-F2-C1). The new Folio is open for comment up to 16th March 2017. Additionally, a general overview of capital dividends and the capital dividend account (CDA) indicates:

  • In accordance with Bill C-29, the reclassification of eligible capital property as depreciable property of a new Class 14.1 of Schedule II to the Regulations, which will be effective from 1st January 2017. The non-taxable portion of capital gains recognized on the disposition of a capital property is incorporated to the corporation’s CDA.
  • A change in paragraph (d) of the definition of CDA in subsection 89(1) of the Income Tax Act. The effect will be that the additional amount of a corporation’s CDA in respect of life insurance proceeds upon the death of a person on or after 22nd March 2016 will be restricted to the amount by which the proceeds exceed the adjusted cost base of a policyholder’s interest in the policy, regardless of whether or not the specific company is the policyholder.
  • an amendment to the explanation of CDA in subsection 89(1) of the Income Tax Act effective for trust distributions made on or after 16th September 2016. The effect of the amendment is that the non-taxable share of a trust’s capital gains that are selected to be those of a corporate beneficiary, will, together with the non-taxable portion of any other capital gains of the corporation, be decreased by the non-allowable portion of the corporation’s realized capital losses.

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