1 December 2004 External T.I. 2004-0098611E5 - Subparagraphs 129(1)(a)(i) and (ii)

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.

Principal Issues: Computation of RDTOH where a dividend refund has not actually been received.

Position: RDTOH is reduced pursuant to paragraph 129(3)(d).

Reasons: The law.

XXXXXXXXXX Michael Cooke
2004-009861
December 1, 2004

Dear Sir/Madam:

Re: Subparagraphs 129(1)(a)(i) and (ii)

This is in reply to your letter of September 17, 2004 wherein you requested our views on the computation of a corporation's "refundable dividend tax on hand" ("RDTOH") as defined by subsection 129(3) of the Income Tax Act (the "Act") in the following situation. All statutory references, unless otherwise indicated, are to the Act.

Specifically, in your letter you question whether the RDTOH of a corporation (the "payer corporation") should be reduced under paragraph 129(3)(d) by its "dividend refund" (i.e. the lesser of the two amounts described in subparagraphs 129(1)(a)(i) and (ii)) where the payer corporation did not actually receive a dividend refund for the taxation year in which it paid the particular dividend. You note that the payer corporation did not receive a dividend refund because it failed to file a return of income for the taxation year that it paid the taxable dividend within the three-year period prescribed by subsection 129(1).

In your letter you also refer to a prior rulings document #2002-0132427 ("prior position") wherein we had expressed the view that in similar circumstances a payer corporation's RDTOH would still be reduced pursuant to paragraph 129(3)(d). However, you question whether our prior position on this matter is in accordance with the wording of the Act.

Our Comments:

While we understand the reasons for your concern, the views expressed in our prior position remain unchanged. The term "dividend refund" is defined by paragraph 129(1)(a) for the purposes of the Act as being the lesser of the two amounts described in subparagraphs 129(1)(a)(i) and (ii). In our view, such lesser amount would reduce the payer corporation's RDTOH pursuant to paragraph 129(3)(d) because it would still be considered to be a dividend refund whether or not it is actually received by that corporation.

Moreover, if a payer corporation's RDTOH was not reduced in circumstances where the payer corporation failed to comply with the provisions of the Act with respect to filing a return of income within the three-year period prescribed by subsection 129(1), the effectiveness of this three-year limitation would be reduced. For your information, we have advised the Department of Finance of our position on this matter.

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 Planning Branch