CRA confirms that payment of a non-eligible dividend by an Opco with both NERDTOH and ERDTOH to Holdco avoids s. 55(2) if the resulting s. 186(1)(b) tax is not refunded as part of the same series

Suppose that Holdco has eligible refundable dividend tax on hand (“ERDTOH”) and non-eligible refundable dividend tax on hand (“NERDTOH”) both of nil, and a general rate income pool (“GRIP”) of $1,000,000, and that its wholly-owned subsidiary, Opco, has ERDTOH, NERDTOH and GRIP of nil, $383,333 and $2,000,000, respectively. There is no safe income attributable to the Opco shares held by Holdco. Opco pays a non-eligible dividend of $1,000,000 to Holdco, and Holdco then pays a $1,000,000 dividend.

On the payment of the Opco dividend, it generates a dividend refund of $383,333, which results in Pt. IV tax payable by Holdco of the same amount, which is added to Holdco’s NERDTOH account. When Holdco in turn pays an eligible dividend of $1,000,000, no dividend refund is generated.

CRA confirmed that s. 55(2) does not apply to the dividend given that the entire amount of the dividend generates a dividend refund of Opco’s NERDTOH balance, such that the dividend is subject to corresponding Pt. IV tax under s. 186(1)(b) in the hands of Holdco – so that the exclusion in the preamble to s. 55(2) applies to the extent that such Pt. IV tax is not refunded as part of the series.

Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.9 under s. 55(2).