Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: 1. What would be the tax results from the application of subsection 55(2) in the examples provided considering the filing of an original return and of an amended return?
2. According to our position, an original return should be sent that includes the Part IV tax payable and the dividend refund to be received. After that filing, an amended return should be filed to compute taxes considering the application of subsection 55(2). The question is whether the amended return should be sent before or after the issuance of the original assessment.
3. Considering the fact that a corporation has to file an original return and an amended return reflecting the consequences of the application of subsection 55(2), is it possible to avoid interest on the higher amount of tax computed in the amended return?
Position: 1. Considering the assumptions given, the dividend refund and Part I and Part IV taxes, see the different results in the letter.
2. The important thing when filing the original return is that it shows that Part IV tax will be paid and the dividend refund will be received with respect to the dividend paid in the same series. However, there is no provision in the Act indicating when an amended return should be filed. Filing the amended return after the filing of the first assessment may be preferable administratively to avoid confusion.
3. Yes.
Reasons: 1. The results would be based on the fact that the portion of the dividend subject to tax under Part IV that is not refunded as a consequence of the payment of a dividend by a corporation in the same series is equal to the amount of Part IV tax computed less the dividend refund, which amount is divided by 0.383333.
2. No legislative provision and administrative process.
3. The corporation could pay the higher amount of tax computed in the amended return at the balance-due date to be applied in the particular taxation year as an advance deposit prepaying the reassessment.
XXXXXXXXXX 2017-071497
U. Chalupa
December 18, 2017
Dear Sir,
Subject: Subsection 55(2) and Part IV Tax
This is in response to your e-mail of July 18, 2017, in which you submitted several hypothetical situations in order to receive our opinion regarding the interrelationship between the Part IV tax and subsection 55(2) of the Income Tax Act (the "Act").
Unless otherwise indicated, all statutory references herein are to the provisions of the Act
Questions
To begin with, you wish to know what the relationship between the Part IV tax and the application of subsection 55(2) would be with respect to the different hypothetical situations.
You also wish to know when the filing of the amended return should be made: either at the same time as the filing of the original return or after the receipt of the notice of assessment confirming the payment or actual refund of Part IV tax.
In the event that you have to wait for the time of receipt of the notice of assessment, you asked us if there would be any interest applicable to the unpaid tax balance (i.e., the difference in tax between the original and amended return).
This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Document No. 2016-0671491C6 provides that the application of subsection 55(2) is based on the actual payment or refund of Part IV tax. In addition, in question 6 at the 2017 Canadian Tax Foundation Annual Tax Conference Roundtable (Document No. 2017-0724071C6 to be published shortly), the CRA noted that, where the Part IV tax exception from the application of subsection 55(2) did not apply because the Part IV tax was refunded as part of the same series of transactions, an amended income tax return of the corporation must account for the Part IV tax originally paid by it.
Based on the foregoing, you will find below our analysis of the interrelation between the Part IV tax and the application of subsection 55(2) with respect to the various hypothetical situations that you have presented to us.
Hypothetical Situations
Example No. 1
1) Holdco held all the shares of the capital stock of Opco, so that the two corporations were connected by virtue of subsection 186(4).
2) Both Holdco and Opco were Canadian-controlled private corporations ("CCPCs").
3) Holdco and Opco had the same year end and the following transactions occurred in the same year that started after 2015.
4) The refundable dividend tax on hand ("RDTOH") of Opco was $383,333.
5) Opco paid a $1M dividend to Holdco. Opco therefore expected to receive a dividend refund ("DR") of $383,333 (based on the lower of 38 1/3% of the dividend paid and its RDTOH balance at the end of the year) .
6) The following assumptions applied:
- The transactions were part of the same series of transactions.
- No safe income contributed to the hypothetical capital gain on the shares of the capital stock of Opco held by Holdco.
- Paragraph 55(2.1)(b) applied to dividends received by Holdco.
7) Holdco had an RDTOH balance at the beginning of its taxation year of $0 and no transaction affected its RDTOH account during the year, except for the transactions described above.
Scenario No. 1
a) Continuing with the facts of the above example, Holdco paid a $1 million dividend to its shareholder, who was an individual, and generated a DR equal to the Part IV tax of $383,333 – for a net result of $0.
b) Paragraph 55(2)(c) would deem the entire $1M dividend received by Holdco from Opco to be a capital gain.
c) Opco had paid, in previous years, refundable tax on investment income of $383,333 (at the least, as it could be higher), which increased its RDTOH balance.
d) By paying the dividend, Opco would end up recovering all its refundable tax previously paid on investment income, for a DR of $383,333.
e) At the time of the preparation of Holdco's original return, the Part IV tax would be $383,333 and its RTDOH would be $383,333.
f) An amended return for Holdco would then be prepared to give effect to subsection 55(2):
- Holdco would be deemed not to have received any dividend by virtue of paragraph 55(2)(a).
- However, the Part IV tax paid by Holdco would be required to remain at $383,333.
- Holdco would end up paying the refundable portion of the Part I tax ("RPPT") on the capital gain in the amount of $153,333 ($1,000,000 X 50% X 30 2/3 %) which would increase its RDTOH account.
- Thus, Holdco's total RDTOH would be $536,666.
- The dividend amount paid by Holdco would not appear to be reduced by any section of the Act and therefore would remain at $1M. Holdco would receive a DR of $383,333 (based on the lower of 38 1/3% of the dividend paid and its RDTOH balance at the end of the year). The net effect of the refundable tax on investment income would therefore be $153,333 (RDTOH: $536,666 and DR: $383,333).
- The result in the amended return for Holdco would be that there would be federal tax payable in respect of the application of subsection 55(2) of $193,333 ($1,000,000 X 50% X 38 2/3%, of which $153,333 could be recovered in the event of a possible dividend payment by Holdco of at least $399,999).
Scenario No. 2
a) Holdco paid a dividend to its shareholder, who was an individual, of $500,000.
b) Paragraph 55(2)(c) deemed Holdco to have a capital gain of $500,000.
c) At the time of the preparation of Holdco's original return, the Part IV tax for Holdco was $383,333 and its RTDOH was $191,667.
d) For the amended return for Holdco, in which the effects of subsection 55(2) would be required to be reflected:
- The Part IV tax exception would apply to the $500,000 and, therefore, Holdco would receive a dividend of $500,000;
- Holdco would be deemed not to have received a $500,000 dividend by virtue of paragraph 55(2)(a).
- However, the Part IV tax paid by Holdco would remain at $383,333.
- Holdco would end up paying RPPT on the capital gain of $76,667 ($500,000 X 50% X 30 2/3%) which would increase its RDTOH account.
- Thus, the total Holdco RDTOH would be $460,000.
- The amount of dividend paid by Holdco would not appear to be reduced by any section of the Act and therefore would remain at $500,000. Holdco would receive a DR of $191,667 (based on the lower of 38 1/3% of the dividend paid and its RDTOHD balance at the end of the year). The net result for the refundable tax on investment income would therefore be $268,333 (RDTOH: $460,000 and DR: $191,667).
- This would ensure that on the amended return of Holdco, there would be federal tax of $288,333 ($500,000 X 50% X 38 2/3% plus ($383,333 - $191,666)), of which $268,333 could be recovered on a potential subsequent dividend paid by Holdco in an amount of not less than $699,999.
e) For greater certainty, it should be noted that any future payment of a taxable dividend by Holdco that resulted in a refund of Part IV tax could result in the potential application of subsection 55(2) to the extent that this payment was part of the same series of transactions. The CRA would consider any future DR as a result of the payment of a dividend by a corporation, where the payment was part of the same series of transactions, as coming first from the Part IV tax paid on the taxable dividend.
Scenario No. 3
Holdco did not pay any dividends to its shareholder as part of the series of transactions.
Subsection 55(2) would not apply because of the Part IV tax exception. Indeed, Holdco would pay Part IV tax of $383,333 and would receive no DR.
For greater certainty, it should be noted that any future payment of a taxable dividend by Holdco that resulted in a refund of Part IV tax could result in the potential application of subsection 55(2) to the extent that this payment was part of the same series of transactions. The CRA would consider any future DR as a result of the payment of a dividend by a corporation, where the payment was part of the same series of transactions, as coming first from the Part IV tax paid on the taxable dividend.
Example No. 2
There are the same facts as in Example No. 1, except that Opco's RDTOH balance instead was $200,000.
Scenario No. 1
a) Paragraph 55(2)(c) would deem the entire $1M dividend received by Opco Holdco to be a capital gain.
b) By paying the dividend, Opco would end up recovering its $200,000 RDTOH and would receive a $200,000 DR.
c) At the time of the preparation of Holdco's original return, the Part IV tax would be $200,000 and its RTDOH would also be $200,000.
d) In preparing an amended return for Holdco so as to give effect to subsection 55(2):
- Holdco would be deemed not to have received any dividend by virtue of paragraph 55(2)(a).
- However, the Part IV tax paid by Holdco would remain at $200,000.
- Holdco would end up paying a RPPT amount on the capital gain of $153,333 ($1,000,000 X 50% X 30 2/3%) that increased its RDTOH account.
- Thus, the total Holdco RDTOH would be $353,333.
- The dividend amount paid by Holdco would not appear to be reduced by any section of the Act and, therefore, would remain at $1M. Holdco would receive a DR of $353,333 (based on the lower of 38 1/3% of the dividend paid and its RDTOH balance at the end of the year). The net result for the refundable tax on investment income would therefore be $0 (RDTOH: $353,333 and DR: $353,333).
- This would ensure that on the amended return of Holdco, there would be federal tax payable in respect of the application of subsection 55(2) of $40,000 ($500,000 X (38 2/3% - 30 2/3%)).
Scenario No. 2
Holdco paid a dividend to its shareholder, who was an individual, of $500,000.
a) In Holdco's original return, the Part IV tax would be $200,000 and the DR would be $191,667.
b) Subsequently, in the amended return for Holdco:
- There would be a dividend not subject to subsection 55(2) in the amount of $21,738 ($8,333 / 38 1/3%) by reason of the Part IV tax exception.
- Paragraph 55(2)(c) would therefore apply to a dividend of $978,262 ($1M - $21,738).
- Part IV tax paid by Holdco would still be $200,000.
- Holdco would end up paying a RPPT on a capital gain in the amount of $150,000 ($978,262 X 50% X 30 2/3%) which would increase its RDTOH account.
- Thus, the total Holdco RDTOH would be $350,000.
- The amount of dividend paid by Holdco does not appear to be reduced by any section of the Act and would therefore remain at $500,000. Holdco would receive a DR of $191,667 (based on the lower of 38 1/3% of the dividend paid and its RDTOH balance at the end of the year).
- The federal tax would be $197,463 ($978,262 X 50% X 38 2/3% plus ($200,000 - $191,667)), and with a $158,333 RDTOH balance that could eventually be recovered.
c) For greater certainty, it should be noted that any future payment of a taxable dividend by Holdco that resulted in a refund of Part IV tax could result in the potential application of subsection 55(2) to the extent that this payment was part of the same series of transactions. The CRA would consider any future DR as a result of the payment of a dividend by a corporation, where the payment was part of the same series of transactions, as coming first from the Part IV tax paid on the taxable dividend.
Scenario No. 3
Holdco did not pay any dividends to its shareholder as part of the series of transactions.
a) In Holdco's original return, the Part IV tax would be $200,000 and the RTDOH would be $0.
b) Subsequently, in the amended return for Holdco:
- The dividend subject to Part IV tax would be $521,739 ($200,000/38 1/3%).
- Thus, the capital gain deemed by section 55(2)(c) would be $478,261 ($1M - $521,739).
- Holdco would end up paying a RPPT amount on the capital gain of $73,333 ($478,261 X 50% X 30 2/3%) which would increase its RDTOH account.
- Holdco's total RDTOH would be $273,333.
- This would ensure that there would be federal tax of $92,464 (i.e. $478,261 X 50% X 38 2/3%) plus Part IV tax of $200,000. (total tax paid by Holdco would be $292,464), for a total RDTOH account of $273,333 that would be available for a DR in future years.
c) For greater certainty, it should be noted that any future payment of a taxable dividend by Holdco that resulted in a refund of Part IV tax could result in the potential application of subsection 55(2) to the extent that this payment ws part of the same series of transactions. The CRA would consider any future DR as a result of the payment of a dividend by a corporation, where the payment was part of the same series of transactions, as coming first from the Part IV tax paid on the taxable dividend.
Filing of returns and interest
Question 4 of the 2016 Canadian Tax Foundation Conference Tax Roundtable (Document No. 2016-0671491C6) indicated that the filing of an original T2 return that includes Part IV tax and a DR (if the dividend is paid in the same taxation year) should be followed by the filing of an amended T2 return that includes the adjustments to be made to the original return to reflect the application of subsection 55(2). This sequence first allows for a demonstration that the Part IV tax on the dividend received by the corporation was actually refunded in respect of the dividend paid as part of the same series of transactions by the same corporation. In such a case, we may find that the dividend received by the corporation was not excluded from the application of subsection 55(2) (where the other conditions are satisfied).
To the extent that we can see that the Part IV tax paid was effectively repaid in respect of a dividend paid as part of the same series by the same corporation and that the conditions in subsection 55(2) are satisfied, the Act does not provide specific rules as to when the amended T2 return must be filed. However, it would be administratively preferable to wait for the initial notice of assessment to be issued before requesting an amendment to the original T2 return to take into account subsection 55(2).
However, regardless of the filing date of the amended T2, it is possible to avoid interest expenses by paying, by the balance due date that is applicable to the corporation, the tax based on the higher amount the corporation may owe in computing its income based on the application of subsection 55(2) on the amended T2 return. However, there are certain administrative rules that must be followed to ensure that the additional amount is allocated by the Minister to the correct taxation year and not refunded by the Minister on the initial notice of assessment.
On the CRA website, you will find a Fact Sheet on Making and Managing Advance Deposits and a document Questions and answers on Advance Deposits at the following addresses:
Fact Sheet: https://www.canada.ca/en/revenue-agency/news/whats-new/fact-sheet-making-managing-advance-deposits.html
Questions and Answers: https://www.canada.ca/en/revenue-agency/news/whats-new/questions-answers-advance-deposits.html
In the Questions and Answers document, Question 8 indicates the following for a situation where a corporation wishes the CRA to keep an overpayment in its account for a future reassessment:
“An overpayment can only be held as an advance deposit for the tax year where the overpayment occurred. This amount cannot be transferred to any other tax year as an advance deposit. If you need an overpayment from a specific return to be held, you can send a request to Corporation Services at your tax centre or call our Business Enquiries line at 1-800-959-5525 prior to filing your return.”
In addition, you could also tick option 3 on line 894 of the initial return and send a written request to a Tax Services Office. To send the written request, you may use Form RC159, Amount Owing Remittance Voucher, to make payments for an amount owing or to prepay a reassessment.
In the latter case, indicate on the remittance voucher that it is an advance payment and indicate the taxation year of the reassessment.
We hope that our comments are of assistance.
Urszula Chalupa, LL.B, M. Fisc.
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2017
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2017
Email this Content