How do I claim intercorporate dividends between my Holdco and Opco?

Dividends from a connected Canadian corporation are generally deductible in the recipient Holdco under Income Tax Act s. 112(1), producing no immediate income inclusion at the Holdco level. Part IV tax under s. 186 may apply at 38.33% on portfolio dividends (or on connected-Opco dividends to the extent the payer got a dividend refund), and that Part IV tax is fully refundable to the Holdco when it later distributes.

Connected means the recipient owns more than 10% of the votes and value of the payer (s. 186(4)). A wholly-owned Opco to its Holdco is always connected. Dividends between connected corporations are: (a) deductible under s. 112, (b) subject to Part IV tax only to the extent the payer Opco received a dividend refund from its own RDTOH on that same dividend.

Mechanism example: an Ontario Opco has $200,000 of Eligible RDTOH. It pays a $500,000 eligible dividend to Holdco and receives a $190,000 dividend refund. Holdco receives $500,000 and pays Part IV tax = $190,000 (matching the payer’s refund). Holdco reports the $500,000 as income and deducts $500,000 under s. 112; net income impact zero, Part IV tax of $190,000 sits in Holdco’s Eligible RDTOH pool. When Holdco later pays a $500,000 eligible dividend to its individual shareholder, it receives its own $190,000 dividend refund from ERDTOH; net corporate tax paid over the chain is zero.

Portfolio dividends (investments below 10%) trigger Part IV at 38.33% on the full dividend, refundable when Holdco distributes.

Note: The Anti-avoidance rules in s. 55(2) can recharacterize a tax-free intercorporate dividend as a capital gain in specific circumstances (safe-income analysis). This is a common Holdco planning trap; get a safe-income calc done before large dividends.

Source: canada.ca — Refundable dividend tax on hand

— Bader A. Chowdry, CPA, CA, LPA — Insight Accounting CPA

Disclaimer: Bader A. Chowdry, CPA, CA, LPA is a Licensed Public Accountant regulated by CPA Ontario. Insight Accounting CPA Professional Corporation is a Chartered Professional Accountant firm. This content is general information only and does not constitute professional advice for your specific facts. Confirm current rules and figures with your own advisor before acting.