Principal Issues: In the scenario, does the CRA agree that the payment of the eligible dividend by Gesco will not prevent the part IV tax exception to apply to the non-eligible dividend paid by Opco to Gesco?
Position: Yes.
Reasons: See below.
FEDERAL TAX ROUNDTABLE, OCTOBER 7, 2021
APFF CONFERENCE 2021
Question 9
Safe Income, Eligible Refundable Dividend Tax On Hand and Non-Eligible Refundable Dividend Tax On Hand
The 2018 federal budget amendments created some significant changes to the Income Tax Act. Among other things, the refundable dividend tax on hand has been separated into two separate accounts, an ERDTOH account and a NERDTOH account.
With the changes to both the ERDTOH and NERDTOH accounts in mind, a question arises as to the exception provided for in subsections 55(2) and 55(2.1). One of those exceptions is that the recipient of the dividend is subject to tax under Part IV that is not refunded as a consequence of the payment of a dividend by a corporation where the payment is part of the relevant series.
Consider the following initial situation:
| HOLDCO | |
| ERDTOH: | $0 |
| NERDTOH: | $0 |
| GRIP: (footnote 1) | $1, 000,000 |
| OPCO | |
| ERDTOH: | $0 |
| NERDTOH: | $383,333 |
| GRIP: | $2, 000,000 |
Holdco owns all of the shares in the capital stock of Opco and those shares have no "safe income."
The different tax accounts of the two corporations are presented in the diagram.
What happens to the application of subsection 55(2) if the series of transactions, as defined in subsection 248(10), consists of the following transactions?
1. Payment of a non-eligible dividend of $1,000,000 from Opco to Holdco;
2.Payment of an eligible dividend of $1,000,000 by Holdco?
Our understanding
Upon payment of an non-eligible dividend of $1,000,000 from Opco to Holdco, Opco will have a dividend refund of $383,333 as provided for in subsection 129(1).
Upon receipt of that dividend, subsection 186(1) provides that Holdco will be liable to pay Part IV tax in the amount of $383,333. The amount of Part IV tax paid by Holdco will increase the corporation's NERDTOH (footnote 2) account.
When Holdco in turn pays an eligible dividend of $1,000,000, no dividend refund will be obtained by the corporation as provided in subsection 129(1).
Although the shares held by Holdco have no safe income, subsection 55(2) could not apply in respect of the dividend received by Holdco since, during the course of the series of transactions, the recipient of the dividend was subject to Part IV tax and that tax was not refunded because of the payment of a dividend.
Question to the CRA
Does the CRA agree with our understanding of the situation?
CRA Response
Yes, based on the facts presented in the question, the CRA agrees with your understanding of the situation. Opco will, by virtue of paragraph 129(1)(a), be entitled to a dividend refund of its RDTOH 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).
Marc Séguin
(514) 620-8562
October 7, 2021
2021-090110
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 General Rate Income Pool ("GRIP").
2 Subsection 129(4) ITA "non-eligible refundable dividend tax on hand".