Holdco receives a dividend of $400,000 that is subject to Part IV tax of $153,333 (38.33% of $400,000) equalling the connected payer’s dividend refund and, in turn, pays a dividend to its shareholders resulting in a refund of the Part IV tax – so that the dividend received by Holdco is subject to s. 55(2). However, such application of s. 55(2) converts the dividend into a capital gain, thereby (it was suggested) reducing the Part IV tax under a circular calculation.
CRA considered such a circular calculation to be contrary to the scheme of s. 55(2), that for a dividend to be subject to s. 55(2), based on a Part IV tax refund, such refund must be a real refund of real tax (as per Ottawa Air Cargo) and that the right approach is for Holdco to declare $153,333 of Part IV tax in its initial return and, in a second return, show the Part IV tax paid for the taxation year as unchanged, even though the amount of the dividend received has been reduced by the application of s. 55(2).