Taking its RDTOH of $383,333 into account, Opco pays a taxable dividend of $1,000,000 to Holdco (its wholly-owning parent also with a calendar taxation year), so that Opco expects to receive a dividend refund of $383,333. Holdco then pays a $1,000,000 taxable dividend to its individual shareholder. Consequently, Holdco will pay Part IV tax of $383,333 but will be eligible for an offsetting dividend refund. Also assume no relevant safe income and s. 55(2.1)(b) applies to the dividend received by Holdco.
In Holdco’s tax return, it would report a $1,000,000 capital gain and no Part IV tax on the dividend, and Holdco would add $153,333 (30 2/3% of $500,000) to its RDTOH account. Therefore, Holdco elects to pay a capital dividend of $500,000 out of the $1,000,000 dividend and treats only the balance of $500,000 as a taxable dividend, which is sufficient to generate a full refund of the $153,333 of RDTOH. Does this work?
CRA responded by indicating that, consistently with Ottawa Air Cargo, the application of s. 55(2) depended on the actual payment of the Part IV tax, and the actual receipt of the refund of the Part IV tax. Accordingly, Holdco should file both an original return (reporting the Part IV tax owing, and its refund) and an amended return (adjusting for the application of s. 55(2) to the dividend received by Holdco). However, the amount of the taxable dividend paid by Holdco to the individual shareholder would not change.
Holdco’s s. 83(2) election would be invalid, as it would retroactively access the application of s. 55(2) to the dividend received from Opco. Consequently, the $500,000 CDA arising from s. 55(2)’s application will be available only for CDA elections made on future dividends.