CRA says late eligible dividend designation possible in case of excess capital dividend

In 2013-0475261E5, the CRA confirmed that a late eligible dividend designation generally should be possible where an excess capital dividend is (later) treated as a taxable dividend. An eligible dividend paid by a Canadian-controlled private corporation (CCPC) is generally taxed at a favorable rate to the receiving shareholders, provided a designation is made at the time the dividend is paid (s. 89(14)). Provision is made under s. 89(14.1) for a late-filed designation where, in the opinion of the CRA, the circumstances are such that it would be just and equitable (to allow it). In 2013-0475261E5, the CRA said that such circumstances may exist if the CCPC made a prior election to pay what was expected to be tax-free capital dividend under s. 83(2), but later discovers it did not have a sufficient capital dividend account (CDA) out of which to pay that capital dividend. In such case, the CCPC may effectively elect under s. 184(3) to treat the shortfall not as a tax-free capital dividend but rather as an ordinary taxable dividend. In addition, the CCPC should be able to designate this taxable dividend as an eligible dividend under s. 89(14.1) provided (1) the CCPC had a sufficient “general rate income pool” (GRIP) balance at the time the dividend was actually paid, (2) the taxpayers took reasonable care at the time the (expected) capital dividend was declared, (3) a late eligible dividend designation was not contemplated at the time the (expected) capital dividend was declared, (4) the late eligible dividend designation is not part of a series of late designations, and (5) the late designation does not involve aggressive tax planning.