Principal Issues: Under CRA’s long-standing position, a corporation (the “Dividend Recipient”) that has received a dividend from a connected corporation (the “Dividend Payer”) would be subject to Part IV tax pursuant to paragraph 186(1)(b) of the Act even if the Dividend Payer (which has RDTOH at the end of a particular taxation year) has not received a dividend refund because its return was not filed within the three-year prescribed period. 1) Considering the Tax Court of Canada decision in Presidential MSH Corporation, whether the Dividend Recipient would be subject to Part IV tax even if the Dividend Payer has not received a dividend refund. 2) If the answer in 1) is yes, how the Dividend Recipient’s part IV tax liability would be determined for a subsequent taxation year if it receives another dividend from the Dividend Payer which entitles this corporation to receive a dividend refund equivalent to the dividend refund denied in the previous taxation year.
Position: First, the CRA will comply with the recent Tax Court of Canada decisions with respect to the computation of a corporation’s RDTOH balance. However, the impact of the recent decisions in this particular context, as well as in the context of interpreting other provisions of the Act referring to the notion of “dividend refund” will be monitored by the CRA. In light of the recent Tax Court of Canada cases, the above-mentioned position will no longer be applied by the CRA and the Dividend Recipient’s Part IV tax entitlement with respect to a dividend received from a connected Dividend Payer will be determined according to the dividend refund received by the Dividend Payer.
Reasons: According to the jurisprudence.
9 OCTOBER 2015 FEDERAL TAX ROUNDTABLE
2015 APFF CONFERENCE
Question 8
Dividend repayment ("DR") requested late and impact on computation of Part IV tax
In recent years, a number of court decisions have confirmed the position of the tax authorities to deny a dividend refund ("DR") if the application is not made within three years of the end of the corporation's taxation year. This is clearly set out in subsection 129(1).
On the other hand, where a DR is denied in such circumstances, the CRA's long-standing position (in technical interpretation 2012-0436181E5) has been that the denied DR still has to reduce the refundable dividend tax on hand ("RDTOH") of Corporation A. Furthermore, Corporation B, which would otherwise be subject to Part IV tax (based on the computed DR for the subsidiary Corporation A) should, according to the same CRA technical interpretation, pay this tax, even if the DR was not received by Corporation A.
In Presidential MSH Corporation v. The Queen (Footnote 1), the judge found that the amount of the DR that reduces the RDTOH balance is the amount determined and reimbursed under subsection 129(1). This position is therefore contrary to that of the CRA set out above. Since this is a General Procedure decision, it sets a precedent.
Questions to the CRA
(a) Is the CRA of the view that the decision in Presidential MSH Corporation is broad enough to change its position in Technical Interpretation 2012-0436181E5 with respect to the payment of Part IV tax? In other words, if the DR is not received by a subsidiary, due to a late claim, is the parent corporation liable to pay Part IV tax on the amount that the subsidiary should have received?
(b) If the CRA concludes that it is still necessary to pay the Part IV tax in the situation described in (a) (although the DR has not been received by the subsidiary and the balance of the subsidiary's RDTOH is consequently not reduced), how will the Part IV tax of the parent corporation be calculated in a subsequent year if the subsidiary pays a further dividend, this time allowing it to receive a DR equivalent to that which it did not receive in the previous period?
CRA Response
To begin with, we are confirming that the CRA will comply with the recent decisions of the Tax Court of Canada [F.n. Namely, Presidential MSH Corporation and Nanica Holding Limited v. The Queen, 2015 CCI 85 [2015 TCC 61 and 2015 TCC 85]] respecting the calculation of the RDTOH of a corporation.
However, the CRA will monitor the impact of recent decisions in their particular context as well as in the context of other provisions of the Income Tax Act (Canada) which refer to the DR concept.
Taking into account these recent decisions, the position raised above will not be applied by the CRA, and the imposition of Part IV tax in conformity with paragraph 186(1)(b) on a corporation receiving a taxable dividend from a connected corporation will be determined on the basis of the DR received by the corporation which paid the taxable dividend.
Jean Lafrenière
(613) 670-9013
2015-059559
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 2015 TCC 61 (« Presidential MSH Corporation »).
2 Namely Presidential MSH Corporation and Nanica Holdings Limited v. The Queen, 2015 TCC 85.