Suppose that Holdco has eligible refundable dividend tax on hand (“ERDTOH”) and non-eligible refundable dividend tax on hand (“NERDTOH”) both of nil, and a general rate income pool (“GRIP”) of $1,000,000, and that its wholly-owned subsidiary, Opco, has ERDTOH, NERDTOH and GRIP of nil, $383,333 and $2,000,000, respectively. There is no safe income attributable to the Opco shares held by Holdco. Opco pays a non-eligible dividend of $1,000,000 to Holdco, and Holdco then pays a $1,000,000 dividend.
On the payment of the Opco dividend, it generates a dividend refund of $383,333, which results in Pt. IV tax payable by Holdco of the same amount, which is added to Holdco’s NERDTOH account. When Holdco in turn pays an eligible dividend of $1,000,000, no dividend refund is generated.
In confirming that even though there is no safe income for the shares held by Holdco, s. 55(2) does not apply, CRA stated:
Opco will, by virtue of paragraph 129(1)(a), be entitled to a dividend refund of its NERDTOH balance of $383,333. Considering that, Holdco will therefore be liable for Part IV tax of $383,333. Consequently, the entirety of that dividend received by Holdco would be subject to Part IV tax and may not be subject to subsection 55(2) by virtue of the exclusion provided for in the preamble to subsection 55(2) to the extent that such Part IV tax is not refunded by reason of the payment of a dividend by Holdco where such payment forms part of the series referred to in subsection 55(2.1).