Simon's Legal Resources

Federal Tax - Excess Elections

. 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 considered taxes under ITA - Part III ['Additional Tax on Excessive Elections']:

VII. Additional Comments: Appellants’ Elections to Treat the Dividends as Taxable

[256] Part III tax is the primary tax liability that arises when an excess capital dividend is paid. However, shareholders who receive such a dividend are jointly and severally liable for a portion of the corporation’s Part III tax, based on their proportionate share of the excess capital dividend: s. 185(4).

[257] A corporation that is liable for Part III tax may elect to treat the excess capital dividend as a separate taxable dividend paid to the shareholders who received it, provided the conditions for the taxable dividend election are met: s. 184(3). In that event, the corporation does not have an excess dividend and is not liable for Part III tax. However, its shareholders are then treated as having received a taxable dividend and thus may be liable for tax. In addition, penalties and interest may be payable as a result of the election: ss. 184(3), (4) and (5).