CRA indicates that the Pt. IV and safe income exclusions under s. 55(2) can now be doubled up

9711005 indicated, before the bifurcation of RDTOH into the eligible refundable dividend tax on hand (“ERDTOH”) and non-eligible refundable dividend tax on hand (“NERDTOH”) accounts, that it was not possible to use both the Part IV tax exception to s. 55(2) and the safe income exclusion.

Holdco holds all the shares of Opco having attributable safe income of $1,000,000 and a fair market value of $5,000,000. Opco has a general rate income pool of $1,000,000 and a NERDTOH balance of $70,000. Before Holdco’s sale of the Opco shares, Opco first pays a $1,000,000 dividend (designated as an eligible dividend) - and then pays a non-eligible dividend of $182,608, which generates a refund of the $70,000 of NERDTOH.

CRA seemed to indicate that Holdco can take advantage of both the $1,000,000 safe income exclusion and of the Part IV tax exclusion.

In particular, it noted that the $1,000,000 dividend is not subject to s. 55(2) as it does not exceed the $1,000,000 of safe income. Furthermore, since Opco is entitled to a dividend refund of its $70,000 in NERDTOH, Holdco is liable for $70,000 of Part IV tax on that dividend, so that such dividend is not subject to s. 55(2) under the Part IV tax exclusion in the s. 55(2) preamble, to the extent that such Part IV tax is not refunded as part of the same series.

Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.5 under s. 55(2).