CRA states that failure to circularly calculate Part IV tax and dividend refund is carelessness

As a result of a tuck-under transaction, two CCPCs each held shares in the other. As one of them had an RDTOH balance, and each paid a deemed dividend or actual dividend to the other, this gave rise to a circular calculation of dividend refunds and Part IV tax: (1) the deemed dividend paid by Corp 1 generated a dividend refund to it which, in turn, generated Part IV tax to Corp 2 under s. 186(1)(b), thereby generating RDTOH to Corp 2; (2) this RDTOH of Corp 2 meant that it generated a dividend refund on the deemed dividend paid by it to Corp 1; which (3) generated Part IV tax and an increase to the RDTOH account of Corp 1, thereby increasing its dividend refund in step 1; and so on.

The Directorate noted that "in general, the circular calculation of the dividend refund and Part IV tax liability of the affected corporations ceases when the dividend refund of the corporation having paid the smaller dividend is equal to 1/3 of the taxable dividend which it is deemed to have paid in the year."

In finding that the transactions could be reassessed beyond the normal reassessment period for carelessness, the Directorate stated that "the necessity to effect the circular calculation…is well known."

Summaries of 30 June 2014 Memo 2013-0508411I7 F under s. 186(1) and s. 152(4)(a)(i).