A corporation that has transitioned to the eligible refundable tax on hand (“ERDTOH”) and non-eligible refundable tax on hand (“NERDTOH”) regime receives a dividend in its taxation year beginning after 2018 from a connected corporation whose taxation year began before 2019. How do the ERDTOH and NERDTOH definitions apply?
After noting that ERDTOH includes Part IV tax paid on taxable dividends received from connected corporations only to the extent that the dividends relate to a refund of ERDTOH to the payer corporation pursuant to subpara. (a)(ii) of the ERDTOH definition – whereas para. (b) of the NERDTOH definition includes all other Part IV taxes payable by the corporation on dividends from a connected corporation, the Directorate stated:
A corporation will not have transitioned to the ERDTOH and NERDTOH regime in its taxation year that begins before 2019 and cannot receive a refund from its ERDTOH account with respect to dividends paid in that taxation year. Therefore, Part IV taxes paid by a recipient corporation in its taxation year that begins after 2018 in respect of a dividend it receives from a connected payer corporation that pays the dividend in its taxation year that began before 2019 will not fall within paragraph (a)(ii) of the definition ERDTOH. Instead Part IV taxes paid by the recipient corporation in respect of such a dividend will be caught by paragraph (b) of the definition of NERDTOH and included in the recipient corporation’s NERDTOH account. This outcome does not appear to be consistent with the policy objectives of the transition rules and, therefore, we have brought this potential unintended consequence to the attention of the Department of Finance.