30 December 2003 External T.I. 2003-0049015 - Private Corporation - Dividend Refund

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: 1. Whether a private corporation can choose whether or not to receive a dividend refund when it pays a taxable dividend and has RDTOH at the end of the year? 2. Does a corporate dividend recipient automatically get a refund of Part IV tax it paid on the taxable dividend it received from a connected payer corporation where the payer corporation was no longer entitled to receive a dividend refund as a result of a carry back of a net capital loss which reduced the particular payer corporations' RDTOH to nil?

Position: 1. No. 2. It is possible to get a refund but the refund is not automatic - see conditions in our response.

Reasons: The law.

XXXXXXXXXX 2003-004901
Michael Cooke
December 30, 2003

Dear XXXXXXXXXX:

Re: Subsection 129(1) and Section 186

This is in reply to your email of November 12, 2003 wherein you requested our comments with respect to the above provisions of the Income Tax Act (the "Act") as they apply to the following fact situation:

Opco and Holdco are Canadian-controlled private corporations controlled by Mr. A. Holdco owns some shares of Opco. Assume Opco and Holdco have the same taxation year-end.

In year 1, Opco realises a large capital gain that generates refundable dividend tax on hand ("RDTOH") within the meaning of subsection 129(3). Opco has no other RDTOH other than that which arose from its capital gain. In year 2, the shares of Opco owned by Holdco are redeemed resulting in a deemed dividend under subsection 84(3). The deemed dividend is a taxable dividend and is the only dividend paid by Opco in year 2. The taxable dividend results in a full refund ("dividend refund") of Opco's RDTOH and, as a result, Holdco is subject to Part IV tax on the full amount of the dividend. In year 3, Opco incurs an allowable capital loss that is a net capital loss that is carried back and deducted by Opco against the taxable capital gain it realized in year 1.

You ask whether Opco has the right to choose not to receive the dividend refund under subsection 129(1) in year 2 in order that Holdco would not have to pay Part IV tax on the taxable dividend it received from Opco. However, if Opco does not have such right, you ask if Holdco would have to make a written request to obtain a refund of any Part IV tax it may have overpaid on the taxable dividend it received from Opco in year 2 as a consequence of Opco no longer being entitled to a dividend refund as a result of the carryback of the net capital loss.

Our Comments:

It is our view, based on subsection 129(1) of the Act, that a private corporation paying a taxable dividend does not have the right to choose not to receive a dividend refund to which it would otherwise be entitled. Moreover, while the Minister may or may not be required to make the dividend refund, such amount is ordinarily refunded automatically provided the payer corporation files its tax return for the year in which the dividend was paid within the time limits described in subsection 129(1) and the amount is not otherwise applied by the Minister, pursuant to subsection 129(2), against another tax liability owing by the payer corporation.

In the above situation, Holdco would be required to pay Part IV tax equal to the amount of Opco's dividend refund on the taxable dividend Holdco received from Opco in year 2. However, if Opco actually repaid the amount of the dividend refund, it is our view that Holdco would have to make a written request to obtain a refund of the Part IV tax it paid in respect of the taxable dividend it received from Opco in year 2. Moreover, as stated in our answer to question 44 of the 1993 Revenue Canada Roundtable, we would only consider Holdco's request if its taxation year for which it paid the Part IV tax (i.e. year 2) is not otherwise statute-barred and at the time of such request Holdco actually has RDTOH in an amount at least equal to the amount of Part IV tax it paid in respect of the dividend from Opco.

We trust that our comments will be of assistance to you. However, as stated in paragraph 22 of Information Circular 70-6R5, the opinion expressed in this letter is not a ruling and consequently is not binding on the CRA.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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