An individual wholly-owned Holdco, which held all of the preferred shares of Opco (also, with a calendar year end), whereas Opco’s common shares were held by others. In 2008, Opco paid dividends of $2,199,995 and $143,915 to the common shareholders and Holdco, respectively; and also redeemed a portion of Holdco’s preferred shares (which had a nominal PUC and ACB), resulting in a s. 84(3) deemed dividend of $529,785 - so that the 2008 dividends totalled $2,873,695 and Opco received a dividend refund (the "DR") of $131,400. Only the preferred share redemption engaged s. 55(2) (the safe income on hand attributable to the preferred shares was nil). No s. 55(5)(f) designation was made.
How is the Part IV tax payable by Holdco and the portion of the dividend subject to s. 55(2) computed?
After discussion the 943963 Ontario, CRA stated:
It follows, therefore, that the amount of the assessable dividend received for the purposes of subparagraph 186(1)(b)(i) remains the same despite the fact that a portion of the dividend may be deemed not to be a dividend under paragraph 55(2)(a).
In light of that decision, we are of the view that no circular calculation is required to be made to determine the Part IV tax payable by Holdco and the portion of the dividend received that is subject to paragraph 55(2)(a) in the Particular Situation.
Accordingly, s. 55(2) would apply to $457,112. This figure is the s. 84(3) dividend of $529,785 minus $72,673, being the portion of the taxable dividend received from Opco that was computed as being subject to Part IV tax under s. 186(1)(b). This reduction is computed as the pro rata portion of the $131,400 dividend refund applicable to the $529,785 s. 84(3) dividend (i.e., $673,700/$2,873,695 * $131,400 = $30,805), multiplied by the 3X dividend refund rate (to produce $92,415) multiplied in turn by the ratio of the s. 84(3) dividend received (of $529,785) to the total dividends received by Holdco (of $673,700).