Tax on excessive capital dividend
A corporation will pay Part III tax of 60% of the amount of any excess capital dividend. However, a corporation can make an election under subsection 184(3) of the Income Tax Act (ITA) to treat the excess amount as a separate taxable dividend. The election is due within 90 days of the mailing of the Part III tax Notice of Assessment.
For example:
ABC Ltd was making an excessive capital dividend of $50,000. Canada Revenue Agency assessed ABC Ltd for Part III tax of $30,000 ($50,000 * 60%).
- ABC Ltd made an election under subsection 184(3) of the ITA to treat the excess amount of $50,000 as eligible dividend.
- ABC Ltd filed T5 summary and supplementary slips.
- ABC Ltd amended Schedule 3 of T2 for the taxation year in which the dividends were paid.
- Shareholders amended their personal tax returns to report the eligible dividends.
Assuming top marginal tax rate for the shareholders was 31.7% for eligible dividends.
The overall tax saving would be $14,150 ($30,000 – ($50,000 * 31.7% = $15,850)) for ABC Ltd to make an election under subsection 184(3).
There is a “short cut method” which by-pass the assessment of Part III tax and reassessment of the Part III tax by filing a subsection 184(3) election. This method is only available if all shareholders of the corporation are individuals.
The election should be make in prescribed manner under the Income Tax Regulation 2106
Send a letter to your Tax Centre stating that the corporation elects under subsection 184(3) of the ITA and include the following documents:
1. A certified copy of directors’ resolution authorizing the election and declaration of concurrence with election.
2. A schedule showing the date of the notice of assessment payable under Part III tax, the dividend amount, and the date the dividend became payable.