November 14, 2018
All Tax Articles

General Rule

Normally, if a Canadian resident corporation (“Recipient”) receives dividends from another Canadian corporation (“Payer”), the dividends are tax-free for Recipient. More specifically, Recipient will include the dividends in income, but will be allowed an offsetting deduction in computing taxable income. With no net addition to taxable income, there is no tax payable.

The reason Recipient can receive the dividend without paying tax is that Payer presumably paid corporate income tax on its earnings that generated the dividend. (Dividends are paid out of after-tax corporate profits.) If Recipient were also subject to tax, there would be double taxation.

Refundable Tax for Certain Dividends

However, in two scenarios, Recipient will be required to pay a refundable tax on dividends it receives from Payer. The tax is 38.33% of the dividends received, and is refundable when Recipient in turn pays out dividends to its shareholders, as further explained below. The refundable tax is called Part IV tax because that is the Part of the Income Tax Act that imposes this tax.

First, if Recipient is a private corporation and it receives dividends on “portfolio shares”, the refundable tax will apply. By “portfolio shares”, we mean that Recipient owns 10% or less of the shares of Payer (counting either votes or fair market value). The 38.33% tax is added to a notional account of Recipient called refundable dividend tax on hand (“RDTOH”). The tax is refunded to Recipient when it pays dividends to its shareholders, on a basis of 38.33% of the dividends paid to its shareholders. The payment of those dividends then reduces the RDTOH.


You own shares in Recipient which in turn owns portfolio shares in Payer (a widely traded public company). In Year 1, Payer declares and pays a $1,000 dividend to Recipient. In Year 2, Recipient pays you a $1,000 dividend.

Result:  In Year 1, Recipient pays $383.33 Part IV tax, which is added to its RDTOH. In year 2, Recipient receives a tax refund of $383.33, and that amount is subtracted from the RDTOH.

As might be appreciated, if Recipient paid you the $1,000 dividend in Year 1, the refund would apply in Year 1 so that no net tax would be payable by Recipient.

Second, if Recipient is a private corporation that owns more than 10% of the shares of Payer (counting both votes and fair market value), or controls Payer, Recipient will be subject to Part IV tax if Payer receives a refund upon payment of dividends to Recipient. This will happen, for example, if Payer was subject to Part IV tax on dividends it received from other corporations and was now receiving a refund because of its payment of dividends to Recipient. The Part IV tax levied on Recipient will equal a proportionate amount of the dividend refund of Payer, based on the dividend it received relative to dividends paid by Payer.


Recipient owns 50% of the shares of Payer.

Payer declares and pays a $1,000 dividend to Recipient, which is 50% of the dividends paid by Payer in the year. As a result of the payment of dividends, Payer receives a dividend refund of $600 (which means that a large amount of its dividend paid to Recipient came out of Payer’s RDTOH).

Recipient will be subject to $300 Part IV tax (50% of $600), which will be added to its RDTOH. That tax will be refunded to Recipient when it pays dividends to its shareholders, again on a basis of 38.33% of dividends it pays.

Note: Beginning in 2019, a corporation’s RDTOH account will be split into two accounts, being the “eligible RDTOH” and the “non-eligible RDTOH”.  Any dividends paid out of the former can result in a refund for the corporation, whereas only non-eligible dividends paid out of the latter will result in a refund. These issues will be discussed in more detail in the upcoming January 2019 Tax Letter.

This letter summarizes recent tax developments and tax planning opportunities from a third-party affiliate; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this blog post, which are appropriate to your own specific requirements. Please feel free to get in touch with Lee & Sharpe to discuss anything detailed above, we would be pleased to help.
Adam H. Sharpe

Hello, my name is Adam Sharpe, I am a partner at Lee & Sharpe.

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