Capital dividend election (Form T2054)
A capital dividend election is the filing a private corporation makes under subsection 83(2) of the Income Tax Act to treat a dividend as a capital dividend. The CRA says it is made on Form T2054 by the election due date, and the dividend is a capital dividend only up to the corporation’s capital dividend account balance, subject to subsection 83(2.1).
An owner-manager meets this election when a company pays out its capital dividend account before or after a sale. The CRA’s folio says a private corporation may elect to pay a capital dividend under subsection 83(2), and that a public corporation may not. The election is made by filing Form T2054 with the CRA, and certain documents travel with it, including a schedule showing the account balance immediately before the election.
What can go wrong
- An election above the account balance is an excessive election, and only the amount equal to the balance is a capital dividend
- The corporation itself faces an additional tax on the excess, which the CRA calls Part III tax; the folio says an election is available to avoid it
- The CRA’s folio says a late-filed election is acceptable in certain circumstances, with the estimated late-filing penalty paid
Ask for the filed T2054 forms and the balance schedules. Related reading is paying a dividend before you sell your shares.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentIncome Tax Folio S3-F2-C1, Capital Dividends
- 02Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
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