The “suspended dividend” rule in proposed s. 129(1.3) can operate anomalously

Here is an example of the rule’s operation:

An individual (X) wholly-owns Holdco, (with a December 31 year end), which wholly-owns Investco (with a November 30 year-end). In its November 30, 2026 taxation year, Investco earns $100,000 of rental income, resulting in $30,667 being added to its non-eligible refundable dividend tax on hand (NERDTOH) balance. On November 30, 2026, it pays an $80,000 non-eligible taxable dividend to Holdco. On March 31, 2027, Holdco pays an $80,000 taxable dividend to X and utilizes its GRIP balance to designate $30,000 of that amount as an eligible dividend. Both Investco and Holdco have balance-due dates (BDDs) two months after their year-ends.

S. 129(1.3) denies Investco’s November 30, 2026, RDTOH refund because the payee, Holdco, is an affiliated private corporation with a BDD after Investco's BDD. However, the $80,000 taxable dividend paid by Holdco on March 31, 2027, will allow Investco to recover its “suspended” $30,667 NERDTOH in that subsequent year.

S. 129(1.32) does not distinguish between an eligible and non-eligible taxable dividend paid by the payee, so that this NERDTOH refund occurs even though Holdco's dividend is partly an eligible dividend – so that there is a more favourable result than if no “suspension” had occurred.

Untoward consequences include:

• A suspended dividend appears to be permanently forfeited if any taxpayer other than the payer relies on a dividend paid by the payee to obtain an RDTOH refund. For example, if Holdco received a $100 ERDTOH refund for its December 31, 2027, taxation year because it paid the $80,000 taxable dividend to X on March 31, 2027, this seemingly would permanently disqualify Investco's entire $80,000 “suspended” dividend from generating a future refund.
• If the dividend payer corporation experiences a loss restriction event after its dividend has been suspended, s. 129(1.32)(a)(i) prevents any subsequent de-suspension.
• In light of Vefghi, where the payer corporation and the beneficiary corporation have aligned but non-calendar year-ends, dividend suspension may still apply by virtue of the dividend being recognized in the beneficiary's subsequent taxation year.

Neal Armstrong. Summary of Kenneth Keung and Taylor Greening, “Suspended dividend and denied RDTOH refund under new subsection 129(1.3),” Tax for the Owner-Manager, Vol. 26, No. 1, January 2026, p. 2 under s. 129(1.3).