24 November 2015 CTF Roundtable Q. 1, 2015-0610691C6 - T2 Late-Filing: Impact on Div. Refund and RDTOH

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: The position of the CRA has been to deny a dividend refund to a corporation that pays a dividend that would otherwise entitle it to the refund but that fails to file its applicable income tax return within the three-year prescribed period required by subsection 129(1). In these cases, the position of the CRA has been that the corporation’s RDTOH balance must still be reduced by the amount of the denied refund. The CRA has also required that a corporation pays Part IV tax if it receives a dividend from a connected corporation that had RDTOH at the end of a particular taxation year even if the dividend payer is denied a dividend refund because its income tax return was not filed within the required three-year prescribed period.
1) Will the CRA follow the recent court decisions that have not required the reduction of a corporation’s RDTOH balance where it was denied a dividend refund because it failed to file its applicable income tax return within the required three-year prescribed period?
2) Based on the recent court decisions will the CRA change its position regarding the payment of Part IV tax by a dividend recipient in the circumstances described above?

Position: 1) Yes. 2) Yes.

Reasons: According to the jurisprudence.

2015 CTF Annual Conference
CRA Roundtable

Question 1: T2 Late-Filing: Impact on Dividend Refund and RDTOH

Over the past few years, a number of court decisions (footnote 1) have confirmed the CRA’s position that a corporation is not entitled to a dividend refund where it pays a dividend for which it would otherwise be entitled to the refund but it fails to file its applicable income tax return within the three-year period (the “Period”) required by subsection 129(1) (footnote 2) .

In these cases, the position of the CRA has been that the corporation’s refundable dividend tax on hand (“RDTOH”) balance must still be reduced by the amount of the denied refund (see document no. 2012-0436181E5).

The CRA has also required that a dividend recipient pays Part IV tax if it receives a dividend from a dividend payer that is a connected corporation that had RDTOH at the end of a particular taxation year even if the dividend payer is denied a dividend refund because its income tax return was not filed within the required Period.

Recently, in Presidential MSH Corporation v. The Queen (footnote 3) and Nanica Holdings Limited v. The Queen (footnote 4) , the Tax Court of Canada held that a corporation’s RDTOH balance is only reduced by the amount of the dividend refund actually received by the corporation.

Question

a) Will the CRA follow these recent court decisions that have not required the reduction of a corporation’s RDTOH balance where it was denied a dividend refund because it failed to file its applicable income tax return within the required Period?

b) Based on the decisions in Presidential MSH and Nanica Holdings will the CRA change its position regarding the payment of Part IV tax by a dividend recipient in the circumstances described above?

CRA Response

The CRA will follow these recent Tax Court of Canada decisions with respect to the computation of a corporation’s RDTOH balance. In 1057513 Ontario Inc. v. The Queen (footnote 5) , the Federal Court of Appeal has also recently stated, in obiter, that unclaimed dividend refunds did not reduce the corporation’s RDTOH balance.

In our view, the court’s objective was to achieve a balance between fostering compliance in the context of Canada’s self-assessment system (the denial of the dividend refund) and continuing respect of the integration principle (the non-reduction of the RDTOH balance).

As well, the CRA will consider that a dividend recipient’s Part IV tax liability with respect to a dividend received from a connected dividend payer will be determined according to the dividend refund actually received by the dividend payer.

The impact of the recent decisions in this particular context, as well as in the context of interpreting other provisions of the Act referring to the notion of “dividend refund”, will be monitored by the CRA.

Jean Lafrenière
2015-061069
November 24, 2015

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 See, among others, Tawa Developments Inc. v. The Queen, 2011 TCC 440, Ottawa Ritz Hotel Company Limited v. The Queen, 2012 TCC 166 and 1057513 Ontario Limited v. The Queen, 2014 TCC 272 (affirmed by the Federal Court of Appeal, 2015 FCA 207).
2 Unless otherwise stated, all statutory references herein are to the Income Tax Act (the “Act”).
3 2015 TCC 61 (“Presidential MSH”).
4 2015 TCC 85 (“Nanica Holdings”).
5 Supra note 1 at paragraph 6.