Principal Issues: How to apply the definitions of eligible refundable tax on hand (“ERDTOH”) and non-eligible refundable tax on hand (“NERDTOH”) in subsection 129(4) to a dividend received from a connected corporation that has not transitioned to the ERDTOH and NERDTOH regime.
Position: Part IV tax payable on dividends received from a connected corporation that has not transitioned to the ERDTOH and NERDTOH regime by a recipient corporation that has transitioned to the ERDTOH and NERDTOH regime should be included in the recipient corporation’s NERDTOH account.
Reasons: Pursuant to subparagraph (a)(ii) of the definition ERDTOH and paragraph (b) of the definition of NERDTOH in subsection 129(4)
December 9, 2020
Yves Thivierge Income Tax Rulings Directorate Senior Programs Officer Tobias Witteveen Assessment, Benefit, and Service Branch 613-670-0590 Business Returns Directorate Corporation and Specialty Returns Division T2 Development
2020-085652
ERDTOH and NERDTOH Transition Rules
We are writing in response to your email dated July 17, 2020 regarding the appropriate interpretation of subsections 129(4) and (5) of the Income Tax Act (the Act) where a corporation receives a dividend in its taxation year beginning after 2018 from a connected corporation whose taxation year began before 2019. Specifically, you have asked about the application of the definitions of eligible refundable tax on hand (“ERDTOH”) and non-eligible refundable tax on hand (“NERDTOH”) in subsection 129(4) of the Act to a dividend received by a corporation that has transitioned to the ERDTOH and NERDTOH regime pursuant to subsection 129(5) of the Act from a connected corporation that has not transitioned to the ERDTOH and NERDTOH regime.
Subsection 129(5) of the Act provides for the transition of a corporation’s existing “refundable dividend tax on hand” (“RDTOH”) account into the new ERDTOH and NERDTOH accounts. Paragraph 129(5)(a) provides that the RDTOH account of a Canadian-controlled private corporation (“CCPC”) is allocated first to the ERDTOH account to the extent of 38 1/3 percent of its general rate income pool “GRIP” balance at the end of its previous taxation year, and any remaining RDTOH balance is allocated to the CCPC’s NERDTOH account. Paragraph 129(5)(b) provides that all of a non-CCPCs final RDTOH balance less the dividend refund for the preceding taxation year is allocated to the non-CCPC’s ERDTOH account. Subsection 129(5) applies to taxation years that begin after 2018. (footnote 1)
The definitions of ERDTOH and NERDTOH are included in subsection 129(4) of the Act and also apply to taxation years that begin after 2018. ERDTOH includes Part IV tax paid on eligible dividends received from a non-connected corporation pursuant to subparagraph 129(4)(a)(i) of the definition of ERDTOH. ERDTOH also includes Part IV tax paid on taxable dividends received from connected corporations to the extent that the dividends relate to a refund of ERDTOH to the payer corporation pursuant to subparagraph 129(4)(a)(ii) of the definition of ERDTOH. NERDTOH includes Part IV taxes payable by the corporation that are not caught by paragraph (a) of the definition ERDTOH pursuant to paragraph (b) of the definition of NERDTOH.
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.
For additional information please see the attached memorandum where this issue has been analyzed in greater detail.
We trust that our comments will be of assistance to you.
Yours truly,
David Palamar
Manager, Reorganizations Section 1
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Subsection 129(5) and the definitions of ERDTOH and NERDTOH in subsection 129(4) of the Act also apply to a taxation year of a corporation that begins before 2019 and ends after 2018 in circumstances where the corporation uses a short taxation year in order to defer the application of certain amendments to section 125 or 129.