We will commence with some key definitions for a better understanding of the contents.

Ask any Canadian what a dividend is and, if they don’t know, they’ll at least say it’s something positive. For the most part, they’d be right.

Dividends are distributions of a corporation’s after-tax earnings to its shareholders. They’re optional to distribute, but corporations often use them to entice or pay shareholders.

Dividend taxation can be confusing, but it’s part of our tax system’s theory of integration: the idea that an individual should pay the same amount of tax whether income is earned personally or through a corporation.

Consider that corporations are distributing earnings that they’ve already paid tax on. For the sake of fairness, dividends are subject to a special gross-up and tax credit calculation. When an individual receives a dividend, the amount received is grossed-up to a higher amount, depending on the type of dividend, to approximate the tax the corporation has paid. Personal tax is then calculated on this grossed-up amount. To compensate for this, individuals can claim a dividend tax credit, which reduces their tax otherwise payable.

The theory of integration doesn’t usually work out precisely as intended, with individuals either realizing tax savings or paying a tax cost from corporate earnings paid out as dividends.

Example
Assume Martha is in a 35% tax bracket and invests in shares of Manfco, a public company. Manfco earns $1,000 and pays corporate tax at a rate of 26.5% in Ontario. Martha has received a $735 eligible dividend from Manfco, which nets Martha less than earning $1,000 personally.

Table 1: Dividend income versus regular

*$735 x 1.38, since eligible dividends are grossed up by 38%.
**$101 = $355 – $254

Planning ideas

• In Ontario, a person can earn up to $35,000 in non-eligible dividends, or $50,000 in eligible dividends and pay no tax (other than health premiums) as long as they have no other income.
• A shareholder doesn’t have to do anything to receive dividend income other than invest in shares, so a corporation doesn’t have to give the person voting power or management responsibility. By contrast, other income-splitting measures, such as paying a salary to family members, are subject to reasonability tests for tax purposes, which is potentially a disadvantage.
• Many income-splitting opportunities, such as those involving family trusts, are based upon the payment of dividends to family members with lower income levels.
• If a person is entitled to a spousal tax credit, dividend income can sometimes be transferred between spouses on their tax returns to minimize tax.

Planning pitfalls

• For seniors receiving old age security benefits, the dividend gross-up system can cause the loss of benefits if the dividend gross-up causes a senior to have income above the claw back threshold.
• Dividend income doesn’t create RRSP room.
• The payment of a dividend by a corporation is not a deductible expense to the corporation, while salary income is.
• Dividend income isn’t helpful to an individual who wants to claim childcare expenses as a tax deduction, since dividends are not considered earned income for that purpose.
• Minimum tax (see AE, March 2017) can sometimes be triggered when an individual has significant dividend income, since dividends are taxed at a more preferential rate than other forms of income.
• Keep in mind that tuition credits must be fully claimed before dividend tax credits, and unused dividend tax credits cannot be carried forward.

Types of dividends

Eligible dividends
Dividends declared from earnings that were taxed at the general tax rate. Shareholders must be notified that a dividend is eligible at the time of payment, whether through website information for a public company or through letters to shareholders for a private company. For the 2016 tax year, eligible dividend income is grossed-up by 38% on an individual’s tax return. The top marginal tax rate on eligible dividends in Ontario is 39.34%.

Non-eligible dividends
Dividends declared from earnings taxed at the small business tax rate. For 2016, non-eligible dividend income is grossed-up by 17% on an individual’s tax return. The top marginal tax rate on non-eligible dividends in Ontario is 45.3%.

Capital gains dividend
A distribution by a Canadian mutual fund of its capital gains. Since the distribution is actually a capital gain, only half of the capital gain distributed will be subject to tax on an individual’s tax return.

Foreign dividend
Dividends from foreign corporations received by Canadian residents are considered to be foreign income, not dividends, for tax purposes. Foreign income is taxed at the same rates as salary or interest

What is Refundable Dividend Tax on Hand (“RDTOH”)?

RDTOH is a mechanism built into the income tax system in order to achieve integration. This concept ensures that income tax payable on investment income is essentially the same whether earned in a corporation and flowed out to its shareholder(s) or earned personally by the shareholder(s), i.e. where in the current environment investments are held in the company name and income is not paid as dividends but reinvested , benefiting the shareholder through deferred payment of taxes at lower small business corporate tax rates.

The RDTOH can be viewed as an account that accumulates refundable tax paid by a private company on its investment and dividend income. Investment income (including interest, rents, royalties, and the taxable portion of capital gains) earned by a Canadian Controlled Private Corporation (“CCPC”) is taxed at approximately 50%. A portion of this tax (calculated as 30.67% of taxable investment income) is added to the RDTOH account. In addition, taxable dividends (often referred to as “portfolio” dividends) received by a CCPC are subject to a refundable tax (Part IV tax) at a rate of 38.33%. The full amount of Part IV tax is also added to the RDTOH account. (Note that dividends received from connected corporations can, in certain instances, also attract Part IV tax.) Amounts in the RDTOH account are refundable to the corporation when a taxable dividend is paid to a shareholder at the rate of $1 of refund for every $2.61 of taxable dividends paid. The refunds are commonly referred to as “dividend refunds” and are deducted from the RDTOH account.

RDTOH should be taken into consideration in any concept comparing an insurance strategy to a corporate owned alternative investment.

The current RDTOH rules

To ensure that there is no advantage for an individual to earn investment income (e.g. interest, dividends, rental income, etc.) in a CCPC, instead of directly, a refundable tax is levied on that corporate investment income, in addition to regular corporate income tax. Accordingly, a corporation’s up front tax paid is approximately equivalent to the taxes that would be paid by an individual earning that income directly.

This refundable tax is tracked in a corporation’s RDTOH account. The refundable tax is recovered by the corporation only when a taxabledividend (eligible or non-eligible) is paid or deemed to be paid to the individual shareholder(s) of the corporation. This refund of tax is referred to as a dividend refund.

Eligible dividends are distributed from a corporation’s general rate income pool (GRIP) and are subject to a lower individual tax rate.

The table below illustrates the tax savings of paying an eligible dividend as opposed to paying a non-eligible dividend in 2019 (based on top combined federal and provincial/territorial dividend tax rates).

General rate income pool (GRIP)

A Canadian-controlled private corporation (CCPC) or a deposit insurance corporation may pay eligible dividends to the extent of its general rate income pool (GRIP) and no excessive eligible dividends were incurred under Part III.1 tax. The GRIP is calculated at the end of the tax year. However, a corporation can pay eligible dividends over the course of the year as long as, at the end of the year, the eligible dividends paid do not exceed its GRIP.
Note
The GRIP is a balance that generally reflects taxable income that has not benefited from the small business deduction or any other special tax rate.

Use Schedule 53, General Rate Income Pool (GRIP) Calculation, to determine the GRIP and file it with your T2 return. You should file this schedule if you paid an eligible dividend in the tax year, or if your GRIP balance changed, to ensure that the GRIP balance on our records is correct.

You can view GRIP balances using the “View return balances” service at:

• My Business Account, if you are the business owner
• Represent a client, if you are an authorized representative or employee

Coming Next……..What does the Future Hold ?…..Part B of the dividend series

What does the future hold?

For taxation years beginning after December 31, 2018, all Canadian controlled private corporations (CCPCs) earning investment income must consider a new set of complex rules relating to their refundable dividend tax on hand (RDTOH) balances. These rules could increase the tax costs to individuals when distributing corporate funds from their private corporations. Before January 1, 2019, taxpayers will need to review their companies’ RDTOH balances to determine whether planning is required.

The new RDTOH regime

The 2018 federal budget announced new measures that restrict the ability to recover RDTOH through the payment of eligible dividends, with limited exceptions. This means that the cost of extracting profits from a CCPC may go up for the typical owner-manager.
Effective for taxation years beginning after December 31, 2018, the existing RDTOH account will be segregated into two new accounts:

•  a non-eligible RDTOH (NRDTOH) account will track the refundable (Part I) taxes incurred on investment income earned (including taxable capital gains), and any refundable (Part IV) taxes on dividends received (net of Part IV taxes tracked in the eligible RDTOH [ERDTOH] pool)
  A refund of the NRDTOH will only be available upon the payment of non-eligible dividends. In all provinces these dividends are taxed at a higher rate than eligible dividends.
• an ERDTOH account will track refundable (Part IV) taxes paid on eligible dividends received from corporations that are not connected,1 as well as eligible dividends received from connected corporations to the extent that these dividends triggered a dividend refund to the payor corporation
  A refund of the ERDTOH account will only be available upon the payment of eligible dividends.
  The existing RDTOH balance will be added to the NRDTOH account except for the transitional amount.

2019 transitional RDTOH amount

A CCPC’s opening ERDTOH account will have a one-time addition equal to the lesser of:

• its existing RDTOH balance
• 38.33% of the CCPC’s GRIP balance
  As a result:
• the corporation’s GRIP balance must be at least 2.6 times the existing RDTOH pool in order for the entire RDTOH balance to qualify as ERDTOH, and
• if the company has an RDTOH balance, but has no GRIP balance, all of the RDTOH will be added to the NRDTOH account

How can your accountant help with the planning strategy?

These new rules will impact taxation years commencing in 2019. To prepare for the change, you should discuss with your adviser whether:

• it is possible to move the GRIP and RDTOH balances into the same company to maximize the addition to the ERDTOH account (for example, if a company has RDTOH but no GRIP, determine if the GRIP in a lower-tiered company can be moved to the higher-tiered company)
• there is a plan to distribute corporate funds to individual shareholders in the next few years because there may be an advantage to speeding up the distribution before 2019 to realize a lower effective tax rate
• for companies with GRIP, but limited RDTOH, it may make sense to trigger investment gains to create an ERDTOH account that can be used for future distributions

The 2018 Federal Budget confirmed the Canadian government’s intent to address Canadian controlled private corporations (CCPC) that earned significant investment income by targeting the Refundable Dividend Tax On Hand (RDTOH) regime. RDTOH is created from passive income earned by a CCPC and as implied in the name, is refunded to the corporation upon payment of taxable dividends. Investment income subject to the RDTOH regime is typically not added to a CCPC’s General Rate Income Pool (GRIP) from which eligible dividends are paid.

Under the historical RDTOH rules, an eligible dividend paid by CCPC could allow for a refund of RDTOH. This provided an opportunity to pay eligible dividends and still recover RDTOH created from investment income, which did not accrete to the CCPC’s GRIP from which the eligible dividend was paid. The eligible dividend would then be taxed at approximately 39 per cent personally rather than the approximate 46 per cent rate for non-eligible dividends (highest personal dividend tax rates in Ontario). Therefore, the individual is subject to a lower personal tax rate in comparison to receiving a non-eligible dividend that would otherwise be paid from passive investment income earnings, and the corporation continues to enjoy a RDTOH refund.

Under the new rules introduced in the 2018 Federal Budget, the existing RDTOH account will be split into eligible RDTOH and non-eligible RDTOH pools. RDTOH created from passive income will accrete to a CCPC’s non-eligible RDTOH account. This will be the case with most passive income apart from eligible dividend receipts. Only non-eligible dividends will result in a refund of non-eligible RDTOH balances. Further, ordering rules will also provide that amounts cannot generally be refunded from a CCPC’s eligible RDTOH account until the non-eligible RDTOH balance has been fully refunded. The character of RDTOH paid on dividends received from a connected corporation would match their payer’s eligible/ non-eligible RDTOH accounts.

The above rules will apply to taxation years beginning on or after January 1, 2019 and transitional measures have been included to compute the opening eligible RDTOH and non-eligible RDTOH balances of a CCPC. The eligible RDTOH balance will be calculated as the lesser of:

• The existing RDTOH balance at the time of the transition; and
• 38 1/3 per cent of the GRIP balance, at the time of the transition

Once the above allocation has been calculated, any remaining RDTOH would be allocated to the non-eligible RDTOH pool. Budget 2018 alludes to the fact that existing RDTOH should not be negatively affected on transition and should be in the eligible RDTOH pool. However, the transition rules included in the legislation create a problem.

How does this change play out?

For example, let us assume that Mr. A owns 100 per cent of his holding company (“HoldCo”) and the HoldCo owns 100 per cent of an operating company (“OpCo”). Furthermore, let us assume that OpCo has a GRIP balance of $10,000,000 and RDTOH of NIL while HoldCo has a RDTOH balance of $2,000,000 and no GRIP.
On transition, HoldCo will have its eligible RDTOH balance calculated as the lesser of:

• The existing RDTOH balance at the time of the transition ($2,000,000); and
• 38 1/3 per cent of the GRIP balance, at the time of the transition ($NIL)
  Therefore, HoldCo’s entire RDTOH balance will be included in the non-eligible RDTOH pool and block any refund of RDTOH when GRIP dividends are paid from OpCo through HoldCo to the individual shareholder. As a result, there is no transitional relief on HoldCo’s RDTOHearned before the new legislation became law.

How to plan for transition

A simple planning decision, that can be undertaken prior to the new regime coming into effect, is to pay an eligible safe income dividend to cause the GRIP balance in HoldCo to equate to the RDTOH balance in HoldCo. To continue our previous example, OpCo would pay an eligible safe income dividend of at least $5,217,392 prior to the transition. On transition, the eligible RDTOH balance of HoldCo will now be calculated as the lesser of:

• The existing RDTOH balance at the time of the transition ($2,000,000); and
• 38 1/3 per cent of the GRIP balance, at the time of the transition ($2,000,000)

The resulting eligible RDTOH balance of HoldCo will now equal at least $2,000,000 with no amounts added to HoldCo’s non-eligible RDTOHpool. Accordingly, eligible dividends can continue to be paid from OpCo through HoldCo to the individual shareholder and still provide for a refund of HoldCo’s RDTOH balances.

Taxpayers should examine their corporate structures prior to the rules coming into force on January 1, 2019 to determine potential planning opportunities.

Corporate RDTOH Planning Opportunities

Currently, through the operation of the refundable dividend tax on hand (RDTOH) rules, a portion of the tax paid on passive income earned by a private corporation is refunded when the corporation pays dividends. The refund is available regardless of whether the dividends paid are eligible dividends (generally from active business income taxed at the general income tax rate) or non-eligible dividends (generally from passive investment income and active business income taxed at the small business tax rate).
As of January 1, 2019, changes to the RDTOH rules will limit the dividend refund to
(1) noneligible dividends paid by the corporation and
(2) Part IV tax on eligible portfolio dividends received by the corporation. What Planning Should You Consider Undertaking in 2018? If a corporation is planning to sell corporate assets in the near future or it has a holding corporation/operating corporation (Holdco/Opco) structure, there are two options that should be considered in 2018 to plan for the RDTOH rule changes.

• Where possible, corporate asset sales planned within the next year or two should be completed before the end of 2018 in order to maximize the corporation’s RDTOH balance at 2018 year end. Due to a transitional rule, a corporation’s existing RDTOH balance at 2018 year end will be allocated to its eligible and non-eligible RDTOH balances for the 2019 taxation year.
• Where a Holdco/Opco structure is in place and Opco has a balance in its general rate income pool (GRIP) and Holdco has RDTOH but low or no GRIP, consideration should be given to whether eligible dividends should be paid by the Opco to the Holdco in 2018 in order to maximize Holdco’s 2019 eligible RDTOH balance.

Non-Eligible Dividend Tax Credit Rates and Amount of Dividends That May be Received Without Incurring Tax in 2018^a Current to: April 30, 2018

Notes:

*A table for 2019 will be added in Summer 2019.
This table assumes only “non-eligible dividend” income is earned and takes into account all federal and provincial taxes, surtaxes, and alternative minimum taxes, but does not include provincial premiums. The respective basic personal and dividend tax credits and provincial tax reductions, where applicable, are also included.“Non-eligible” dividends are those that are not subject to the dividend rules applying to “eligible” dividends (see table I-6). The gross-up rate for non-eligible dividends is 16%. The actual amount received is therefore multiplied by 1.16 to determine the taxable amount of the dividend.
A The federal and provincial dividend tax credit (DTC) rates in the table’s first column apply to the actual amount of the dividend received by an individual. The DTC rate can also be expressed as a percentage of the taxable dividend, as indicated in the table’s second column.
B The federal DTC rate that applies to non-eligible dividends decreased to 10.03% (from 10.52%) of taxable dividends beginning January 1, 2018. The dividend gross-up factor that applies to non-eligible dividends also decreased to 16% (from 17%) beginning January 1, 2018.
C Ontario decreased the province’s DTC rate that applies to non-eligibledividends to 3.12% (from 4.29%) of taxable dividends effective January 1, 2018.

Coming Next……..

The Federal Dividend Tax Credit in Canada…. Part C

The Federal Dividend Tax Credit in Canada
If you are a shareholder in a Canadian corporation, you may earn dividend income, which should be reported on your tax return. Typically, you also may be eligible to receive the federal dividend tax credit.

This is a non-refundable credit that reduces the amount of tax you owe.The “ dividend tax credit is given to avoid double taxation.”

Eligible and Ineligible Dividends

Corporations designate dividends as eligible or ineligible. The difference is negligible to you, except for tax purposes. As an investor, you’ll be able to note on your T5 statement of investment income whether your dividend is eligible or ineligible.

If you’re an employee who works for the corporation, you’ll receive a T4PS, which is a statement of employee profit sharing plan allocations and payments.

According to the Canada Revenue Agency, other statements that may include dividend income are:

• A T3, statement of trust income allocations and designations;
• A T5013, statement of partnership income;
• A T5013A, statement of partnership income for tax shelters and renounced resource expenses.

Dividend Income and Gross Up
Your dividend income gets added to your taxable income. In addition to reporting the amount you earned in dividend income, you should account for a gross up. Think of a gross up as an increase to account for applicable taxes.

For example, say your job pays $5,000 per week, but your salary is $5,500 per week because your employer wants $5,000 to be your income after taxes. This means your employer has grossed-up your salary.

The CRA has you add in a gross up to account for any tax the corporation has already paid on your dividend income.

Currently, the gross up rate is 38 percent for eligible dividends. Beginning in the tax year 2016, the gross up rate on ineligible dividends is 17 percent. This rate is slated to drop an additional one percent per year for the next two years.

The decrease is due to “corporate taxes going down,”

Calculating Dividend Income With Gross Up

As an example, if you received $200 worth of eligible dividends and $200 worth of ineligible dividends, you would have to gross up you eligible and ineligible dividends by 38 percent and 25 percent, respectively. So, you would claim $526 as dividend income on your return:

• ($200 X 138 percent) = $276 ($200 X 125 percent) = $250 $276 + $250 = $526

Calculating the Credit

The CRA allows you to calculate the federal dividend tax credit one of two ways:

1. As a percentage of the grossed up value of your dividend income (15.0198% of eligible dividends, as of 2015);
2. As a fraction of the gross up portion of your dividend income (6/11 of eligible dividends; as of 2015).

Continuing the example, a $200 eligible dividend had a grossed up value of $276, so either method of calculation would produce the same results:

• $276 X 15.0198 percent = $41.45 2) $76 X (6/11) = $41.45

Why You Receive Credit

The purpose of the federal dividend tax credit is to balance things out. You receive your share of the corporation’s earnings as a dividend.

You pay a gross up to turn that income back into pretax income — because the corporation has already paid taxes on it — then, you receive a tax credit to make it fair for everyone.

Both you and the corporation aren’t being double-taxed and the CRA subsidizes you for the tax the corporation already paid on your dividends.

Refundable portion of Part I tax
Lines 440, 445, and 450
The refundable portion of Part I tax is part of the refundable dividend tax on hand (RDTOH). More information about RDTOH is in the section that follows.

The refundable portion of Part I tax allows a CCPC that has paid Part I tax on investment income to recover part of that tax when the corporation pays taxable dividends to its shareholders. The refundable portion of Part I tax only applies to corporations that are CCPCs throughout the tax year.

The refundable portion of Part I tax is based on the aggregate investment income and foreign investment income. You have to determine these amounts by completing Parts 1 and 2 of Schedule 7, Aggregate Investment Income and Active Business Income.

Part 1 – Aggregate investment income calculation

The aggregate investment income is the aggregate world source income calculated as follows:

add

• the eligible portion of the taxable capital gains for the year that is more than the total of:
  • the eligible portion of allowable capital losses for the year
  • the net capital losses from previous years which are applied in the year
• total income from property (including income from a specified investment business carried on in Canada other than income from a source outside Canada) from which the following amounts have been deducted:
  • exempt income
  • AgriInvest receipts (include the Quebec amount)
  • taxable dividends deductible after deducting related expenses
  • business income from an interest in a trust that is considered property income under paragraph 108(5)(a)

deduct

• total losses for the year from property (including losses from a specified investment business carried on in Canada other than losses from a source outside Canada)

On line 440 enter the amount of aggregate investment income that you determined on line 092 of Schedule 7.

You can include taxable capital gains and allowable capital losses in a CCPC’s net investment income only if you can attribute the gain or loss to a period of time when a CCPC, an investment corporation, a mortgage investment corporation, or a mutual fund corporation held the disposed property.

Part 2 – Foreign investment income calculation

The foreign investment income is all income from only sources outside of Canada calculated as follows:

add

• the eligible portion of the taxable capital gains for the year that is more than the eligible portion of allowable capital losses for the year
• the total income from property from a source outside Canada from which the following amounts have been deducted:
  • exempt income
  • taxable dividends deductible after deducting related expenses
  • business income from an interest in a trust that is considered property income under paragraph 108(5)(a)

deduct

• the total losses for the year from property from a source outside Canada

On line 445 enter the amount of foreign investment income that you determined on line 079 of Schedule 7.

Calculate the amount of the refundable portion of Part I tax. Enter the amount from line 450 at amount P in the “Refundable dividend tax on hand” area of your return.

References

Subsections 129(3) and 129(4) IT 73, The Small Business Deduction IT 269, Part IV Tax on Taxable Dividends Received by a Private Corporation or a Subject Corporation

Refundable dividend tax on hand

Lines 460, 465, 480, and 485

The RDTOH account only applies to corporations that were private or subject corporations.

A CCPC generates RDTOH on both the Part I tax it pays on investment income, and on the Part IV tax it pays on dividends it receives. For any other type of private corporation, only the Part IV tax it pays generates RDTOH.

For more information on taxable dividends deductible under section 112 or 113, or subsection 138(6), see line 320.

For information on Part IV tax and instructions to complete Schedule 3, see line 712 – Part IV tax payable.

All or part of the RDTOH at the end of the tax year is available as a refund if the corporation pays taxable dividends to the shareholders during the tax year.

You can view refundable dividend tax on hand balances using the “View return balances” service through:

• My Business Account, if you are the business owner
• Represent a Client, if you are an authorized representative or employee

To calculate the RDTOH at the end of the tax year, add the following amounts:

• the RDTOH balance at the end of the previous tax year (minus any dividend refund issued to the corporation in the previous year)
• the refundable portion of Part I tax from line 450
• Part IV tax calculated on line 360 of Schedule 3
• any balance of RDTOH transferred from a predecessor corporation on amalgamation, or from a wound-up subsidiary corporation

For the first tax year of a new corporation formed as a result of an amalgamation, enter on line 480 all RDTOH balances being transferred from predecessor corporations. Do not include this amount on line 460.

For a parent corporation that wound up a wholly owned subsidiary, enter on line 480 any RDTOH transferred from the subsidiary corporation. On line 460, enter the RDTOH the parent corporation is carrying forward from its previous tax year.

Note

You cannot transfer any RDTOH to a new or parent corporation if, had the predecessor or subsidiary corporation paid a dividend immediately before the amalgamation or wind-up, subsection 129(1.2) would have applied to that dividend.

On line 485, enter the RDTOH at the end of the tax year. Also, enter it at amount T in the “Dividend refund” area of your return.

References
Subsections 129(3) and 186(5)

Dividend refund

A private or subject corporation may be entitled to a dividend refund for dividends it paid while it was a private or subject corporation, regardless of whether it was a private or subject corporation at the end of the tax year.

Note

To claim a dividend refund or to apply the amount to another debit for any tax year, including the same tax year, you have to file your income tax return within three years of the end of the tax year. If your income tax return is not filed within three years of the end of the tax year, the dividend refund becomes statute barred, and will not be issued.

A dividend refund arises if you pay taxable dividends to shareholders, and if there is an amount of refundable dividend tax on hand (RDTOH) at the end of the tax year. To claim a dividend refund, you have to have made an actual payment to the shareholders, unless the dividend is considered paid (a deemed dividend).

For tax years that begin after 2018, a private corporation’s dividend refund will be calculated by reference to two new accounts, the eligible refundable dividend tax on hand (ERDTOH) and the non-eligible refundable dividend tax on hand (NERDTOH). They will replace the existing RDTOH account for those years.

Eligible dividends will generate dividend refunds from ERDTOH, and non-eligible dividends will generate dividend refunds from NERDTOH first, then possibly from ERDTOH. The calculation will effectively require a private corporation to get a refund from its NERDTOH account before it gets a refund from its ERDTOH account, when it pays a non eligible dividend. A transitional rule will preserve the refundability of a corporation’s pre existing RDTOH.

For more information on eligible dividends, go to Eligible dividends or see Line 710 – Part III.1 tax payable.

You can make this payment either in cash, or with some other tangible assets at fair market value, including the following:

• stock dividends
• section 84 deemed dividends
• amounts paid as interest or dividends on income bonds or debentures that are not deductible when calculating income

If you lose your private status following a change in control, a deemed year-end occurs. This allows you to claim a dividend refund for any dividends paid during the deemed short year.

You have to complete Parts 3 and 4 (if they apply) of Schedule 3 to claim a dividend refund. The dividend refund is equal to whichever of the following amounts is less:

• for tax years that end after 2015, 38 1/3% of taxable dividends that you paid in the year as a private or subject corporation (the previous rate was 33 1/3%). For tax years that end after 2015 and start before 2016, the additional 5% is prorated according to the number of days in the tax year that are after 2015
• the RDTOH at the end of the tax year

The total of taxable dividends paid for the purpose of the dividend refund is equal to the amount on line 460 of Schedule 3. Refundable dividend tax on hand refers to the amount on line 485 in the “Refundable dividend tax on hand” area of your return.

Parts 3 and 4 of Schedule 3

The following explains how to complete Parts 3 and 4 of Schedule 3. See Parts 1 and 2 of Schedule 3 for explanations on the first two parts of the schedule.

If you paid taxable dividends during the year, complete Part 3 to identify taxable dividends that qualify for the dividend refund.

If the amount of dividends paid includes dividends that do not qualify for the dividend refund, you have to deduct these dividends before completing the calculation in Part 3. In this case, complete Part 4 of Schedule 3 to identify dividends that do not qualify.

Dividends that do not qualify are:

• dividends paid out of the capital dividend account
• capital gains dividends
• dividends paid for shares that do not qualify as taxable dividends, because the main purpose of acquiring the shares was to receive a dividend refund [subsection 129(1.2)]
• taxable dividends paid to a controlling corporation that was bankrupt at any time in the year

Complete Part 3 of Schedule 3 to identify a connected corporation that received taxable dividends that qualify for the dividend refund.

If the dividend refund is more than the amount of Part I tax payable for the year, we deduct the excess from any other taxes owed under the Income Tax Act. Any balance left over is available for a refund.

If the total dividends paid during the year is different from the total of taxable dividends paid for the purpose of the dividend refund, complete Part 4 of Schedule 3.

References
Section 129
Subsection 186(5)