Has anyone paid out capital dividend to the shareholder since the new inclusion rate rules have come into effect? I have a balance confirmation from YE2023 (Aug 31) from CRA, but because the corporation has a regularly traded portfolio as its main asset, I have to make sure my CDA calculation is brought up to the date of payment. I plan on paying out dividend as at July 31st. An election would have to be filed a few days late to allow for the portfolio manager to produce reports, me to update S89, and get corporate lawyers to draft a resolution. I am aware of the late filing penalty, but don’t know how else to do it in order to comply within time limit.
The shareholder has retired last year and needs cash, it was our intent to pay out the dividend once a confirmation was received from CRA, and in amidst of it all they’ve gone and changed the rules.
There was talk that the Department of Finance was going to change their position on blending the rate of inclusion for companies depending on their year’s gains and losses and implement a point in time calculation, but I haven’t seen these updated yet. Have you?
In the meantime, can I pay a smaller dividend amount than my current calculations? For example, to be on the safe side, just pay out “confirmed” amount from CRA as they were at Aug 31, 2023? And pay out any additional dividends accumulated due to gains after the YE (Aug 31, 2024)?
I may be missing something, but I can’t see how the inclusion rate change (dated June 2024) could have any effect on the CDA balance as of Aug 31, 2023. The CDA balance won’t change unless there are capital dispositions during the fiscal year Sep 1, 2023 - Aug 31, 2024, and those changes wouldn’t be eligible for a CDA payout until after Aug 31, 2024.
There is no change to capital gains prior to June 25th, 2024. If you have a CDA balance prior to this date, nothing changes, and you can payout the balance as it stands.
When you do the corporations 2024 year ended, you will need to internally track any capital gains prior to, and after this date. Given you have reconciled this correctly, your CDA as at August 31, 2024 year ended will reflect a balance that consists of both inclusion rates. Do it properly, and do it after YE. Pay the minimal penalty, most people do.
As above.
Sure why not, but you need to pass a resolution showing the capital dividends as payable on that date… which may potentially be challenged by CRA given the balance is not paid already. Food for thought.
Really, this should have been considered already when the federal budget was announced initially.
The corporation has an actively traded investment portfolio, so there are dispositions throughout the fiscal year 2024, both prior to June 24 and after that date.
I thought CDA balance is calculated at a point in time, so I would calculate the gains from dispositions for two periods September 1 - June 24/2024 at 50% (CDA 50%), and from period of June 25 to July 31/2024 at 66.67% (CDA 33.33%). But I was going to pay only the “safe” amount which was confirmed by CRA as at August 31, 2023 as to not overpay the balance, since the inclusion rates are going to be determined at year end depending on the overall gains/losses.
Why would the gains not be eligible to be paid out until after the year end Aug 31/2024?
Seems like this is going way out in left field. I never (almost) do a capital dividend without first getting a balance confirmation from CRA. The one time I went ahead without waiting for confirmation, I was over by $290. Something that happened in maybe 1987 caused me to overpay the capital dividend. I called whoever signed the letter to discuss the consequences, and he said there weren’t any for an amount that small. But to keep a record of it for future dividends and try not to do it again. I updated the T2 to include the overpayment so it will show up next time. Then, about a year later I get the OK letter from CRA. I assume TaxCycle will update the capital disposition schedule to include disposition date so that the inclusion is done properly.
Remember a number of years ago when we had 3 rates in one year? I think it went from 3/4 to 2/3 to 1/2. And we had these average rate taken out to something like 10 decimal places. I had an older client who drafted everything on a columnar pad, then typed it all out by hand, and had the inclusion rate calculated to an unbelievable extent. Crazy year.
Sorry @olgag1 - I was mistaken. I’ve never tried to do a CDA election with a balance that CRA doesn’t yet know about (i.e. mid-year). I’ve always treated the CDA balance similar to a RDTOH balance or a GRIP balance.
I just looked it up, and you are correct - you could calculate the CDA balance as of any particular date, and provide your calculations and supporting documents to CRA to prove that balance (instead of using the S89). I’ve never tried that. I just wait until the CDA effects have been “registered” by CRA, as a result of filing the T2. And, I advise my clients (even the ones that have active trading portfolios) not to do a capital dividend filing unless their CDA account has a significant balance (i.e. $10,000+), because we charge $400 - $500 to prepare and file a T2054 with all the required supporting documents.
Is there a reason you can’t wait until Sep 2024 to do the T2054? Or, if there are CDA effects every year, why not do one using the Aug 2023 CDA balance, then wait a few years before doing another one?
Thanks for sharing your regular practice!
The timing is tricky for a few reasons:
- Client had some health issues and got the documents to me later than usual to prepare their year end. I had filed the YE return on time, but had to wait till I was through with my personal tax season to focus on calculating CDA. Since I was not always the accountant for this client, I wanted to make sure I confirmed previous balances, as there was a capital dividend received from a related corporation in the past and I had to dig into the old records from the lawyer and previous accountant to confirm that.
- I wanted to confirm the balance with CRA beyond the doubt due to the historical transactions in prior years mentioned above so I filed S89 at the end of April to request balance confirmation.
- It took CRA 8 weeks to confirm the balance (happy news my balance calculated was correct!), pretty much right around the time when the new rules were announced with no solid technical interpretation. The department of finance is still expected to comment on CDA treatment due to “blended” year end inclusion rate.
- I’ve issued instructions to the broker to raise cash in the account as soon as I’ve received the confirmation of the balance. This cash is sitting just idling in the corporate investment account and I don’t want the shareholder to miss out on earning income on this amount, preferably in his personal hands (after the CDA pmt is made).
I guess, another month of idle cash is not going to hurt anyone too much. The shareholder does not need cash desperately to fund his basic living needs. We are not talking millions (approx. $100K). Between late filing fees, my extra fees to do the research etc, it might just even out if I wait till year end, obtain portfolio reports and use the software to calculate the balance. Declare the dividend payable on Aug 31, 2024. However, I am not sure how long the rules are going to be in limbo and when tax software is going to be updated once they are actually released.
Fun times!
I have done multiple capital dividends mid-year based on rather large capital gains that happened in the year. They have all been accepted by the CRA. I made sure to include the details of the gains that were not yet registered via T2.
Thank you dawna777. Have you paid out a lesser amount than you’ve calculated just to be on a safe side and not pay out excess dividend?
With the new rules not yet finalized, I want to make sure we don’t overestimate CDA.
On form T2054, line 2A in Part 2 does say if the difference between line 100 and line 110 in negative (meaning the amount of payment is less than CDA balance), enter $0. I am surmising from this that one doesn’t have to pay out the whole calculated balance.
I always pay out slightly less to be safe.
This is typically handled in the required legal resolution (a copy of which must be included with the T2054), specifying that if CRA determines the dividend amount to be greater than the CDA balance, they should adjust the dividend amount.
Question on T2054 - there is a section that asks for information on shareholders “that have received a dividend for which the election is made” - from the wording it seems that this would only be filled out if payment was made before the election was filed. Do I have this right?