CRA notes that on the transition to the ERDTOH/NERDTOH regime there can be an anomalous addition of Part IV tax on a connected corporation dividend to the recipient’s NERDTOH

CRA has confirmed that the eligible refundable tax on hand (“ERDTOH”) definition applies in an anomalous manner where a corporation that has transitioned to the ERDTOH and non-eligible refundable tax on hand (“NERDTOH”) regime receives a dividend in its taxation year beginning after 2018 from a connected corporation whose taxation year began before 2019. In particular, Part IV tax payable on the dividend will always be added to the recipient corporation’s NERDTOH even where normatively it should have been added to its ERDTOH. The reason is that (a)(ii) of the ERDTOH definition only adds the Part IV tax if it generated a dividend refund to the connected payor out of its ERDTOH – and since the connected payor by assumption had not yet transitioned to the ERDTOH/NERDTOH regime, this would not be possible.

CRA stated:

This outcome does not appear to be consistent with the policy objectives of the transition rules and, therefore, we have brought this potential unintended consequence to the attention of the Department of Finance.

Neal Armstrong. Summary of 9 December 2020 Internal T.I. 2020-0856521I7 under s. 129(4) - ERDTOH – s. (a)(ii).