What triggers Part IV tax on intercorporate dividends?

Part IV tax under ITA s. 186 applies at 38.33% to (a) all portfolio dividends received by a private corporation from a non-connected Canadian corporation, and (b) dividends from a connected Canadian corporation to the extent the payer received a dividend refund from its RDTOH pools when paying the dividend.

Two triggers. Trigger 1 (portfolio): recipient owns 10% or less of the votes and value of the payer. Every dollar of dividend received is subject to Part IV tax at 38.33%. Purpose: prevent tax-deferral advantage from holding portfolio investments inside a private corp.

Trigger 2 (connected): recipient owns more than 10% of votes and value. Dividends are only subject to Part IV to the extent the payer received a dividend refund on those dividends. Purpose: recapture the payer’s refunded tax by taxing the recipient equivalently.

Example: Holdco owns 100% of Opco. Opco has $190,000 in ERDTOH. Opco pays a $500,000 eligible dividend to Holdco and receives its $190,000 dividend refund. Holdco pays Part IV tax = $190,000 (the payer’s refund). Holdco’s ERDTOH increases by $190,000; when Holdco pays a $500,000 eligible dividend to its individual shareholder, Holdco gets a $190,000 dividend refund of its own. Net effect: refunded tax cascades cleanly.

Part IV is fully refundable at $1 per $2.61 of dividends paid (the same 38.33% rate). Sits in ERDTOH (eligible portion) or NERDTOH (non-eligible portion) waiting for distribution.

Note: A dividend that would be non-taxable under s. 112(1) can still trigger Part IV tax. The two are independent mechanisms.

Source: canada.ca — Part IV tax

— 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.