T2 Corporation – Income Tax Guide – Chapter 6: Pages 6 and 7 of the T2 return

From: Canada Revenue Agency

Refundable portion of Part I tax

Lines 440, 445, and 450

The refundable portion of Part I tax is part of the refundable dividend tax on hand (RDTOH). More information about RDTOH is in the section that follows.

The refundable portion of Part I tax allows a CCPC that has paid Part I tax on investment income to recover part of that tax when the corporation pays taxable dividends to its shareholders. The refundable portion of Part I tax only applies to corporations that are CCPCs throughout the tax year.

The refundable portion of Part I tax is based on the aggregate investment income and foreign investment income. You have to determine these amounts by completing Parts 1 and 3 of Schedule 7, Aggregate Investment Income and Income Eligible for the Small Business Deduction.

Part 1 – Aggregate investment income calculation

The aggregate investment income is the aggregate world source income calculated as follows:

add

  • the eligible portion of the taxable capital gains for the year that is more than the total of:
    • the eligible portion of allowable capital losses for the year
    • the net capital losses from previous years which are applied in the year
  • total income from property (including income from a specified investment business carried on in Canada other than income from a source outside Canada) from which the following amounts have been deducted:
    • exempt income
    • AgriInvest receipts (include the Quebec amount)
    • taxable dividends deductible after deducting related expenses
    • business income from an interest in a trust that is considered property income under paragraph 108(5)(a)

deduct

  • total losses for the year from property (including losses from a specified investment business carried on in Canada other than losses from a source outside Canada)

On line 440 enter the amount of aggregate investment income that you determined on line 092 of Schedule 7.

You can include taxable capital gains and allowable capital losses in a CCPC's net investment income only if you can attribute the gain or loss to a period of time when a CCPC, an investment corporation, a mortgage investment corporation, or a mutual fund corporation held the disposed property.

Note 

Part 2, Adjusted Aggregate Investment Income, of Schedule 7, is used to calculate the small business deduction for tax years starting after 2018 on page 4 of the return.

Part 3 – Foreign investment income calculation

The foreign investment income is all income from only sources outside of Canada calculated as follows:

add

  • the eligible portion of the taxable capital gains for the year that is more than the eligible portion of allowable capital losses for the year
  • the total income from property from a source outside Canada from which the following amounts have been deducted:
    • exempt income
    • taxable dividends deductible after deducting related expenses
    • business income from an interest in a trust that is considered property income under paragraph 108(5)(a)

deduct

  • the total losses for the year from property from a source outside Canada

On line 445 enter the amount of foreign investment income that you determined on line 079 of Schedule 7.

Calculate the amount of the refundable portion of Part I tax. For tax years starting before 2019, enter the amount from line 450 at amount P in the "Refundable dividend tax on hand" area on page 6 of your return. For years starting after 2018, enter the amount from line 450 at amount Q in the new “Refundable dividend tax on hand” area on page 7 of your return.

References
Subsections 129(3) and 129(4)
IT‑73, The Small Business Deduction
IT‑269, Part IV Tax on Taxable Dividends Received by a Private Corporation or a Subject Corporation

Refundable dividend tax on hand

Note 

For tax years starting before 2019, do this calculation on page 6 of the return. For tax years starting after 2018, do the calculation on page 7. For tax years starting after 2018, a private corporation's dividend refund will be calculated by reference to two new accounts, the eligible refundable dividend tax on hand (ERDTOH) and the non-eligible refundable dividend tax on hand (NERDTOH). They will replace the existing RDTOH account for those years.

For more information on eligible dividends, go to Eligible dividends or Line 710 – Part III.1 tax payable.

Lines 460, 465, 480, 485, 530, and 545

The RDTOH account only applies to corporations that were private or subject corporations.

A CCPC generates RDTOH on both the Part I tax it pays on investment income, and on the Part IV tax it pays on dividends it receives. For any other type of private corporation, only the Part IV tax it pays generates RDTOH.

For more information on taxable dividends deductible under section 112 or 113, or subsection 138(6), see line 320.

For information on Part IV tax and instructions to complete Schedule 3, Dividends Received, Taxable Dividends Paid, and Part IV Tax Calculations, see line 712 – Part IV tax payable.

All or part of the RDTOH at the end of the tax year is available as a refund if the corporation pays taxable dividends to the shareholders during the tax year.

You can view refundable dividend tax on hand balances using the "View return balances" service through:

To calculate the RDTOH at the end of the tax year, add the following amounts:

  • the RDTOH balance at the end of the previous tax year (minus any dividend refund issued to the corporation in the previous year)
  • the refundable portion of Part I tax from line 450
  • Part IV tax calculated on line 360 of Schedule 3
  • any balance of RDTOH transferred from a predecessor corporation on amalgamation, or from a wound-up subsidiary corporation

On line 460, enter the RDTOH the parent corporation is carrying forward from its previous tax year.

Enter on line 465, any dividend refund issued to the corporation in the previous year.

For the first tax year of a new corporation formed as a result of an amalgamation, enter on line 480 all RDTOH balances being transferred from predecessor corporations. Do not include this amount on line 460.

For a parent corporation that wound up a wholly owned subsidiary, enter on line 480 any RDTOH transferred from the subsidiary corporation. For tax years starting after 2018 that have established ERDTOH and NERDTOH balances, enter the amounts transferred as a result of an amalgamation or the wind-up of a subsidiary on line 525 for the ERDTOH and on line 540 for the NERDTOH.

Note

You cannot transfer any RDTOH to a new or parent corporation if, had the predecessor or subsidiary corporation paid a dividend immediately before the amalgamation or wind-up, subsection 129(1.2) would have applied to that dividend.

For tax years starting before 2019, enter the RDTOH at the end of the tax year on line 485. Also, enter the same amount at amount T in the “Dividend refund” area on page 6 of your return. For tax years starting after 2018, enter the NERDTOH at the end of the tax year on line 545 and at amount EE in the new “Dividend refund” area on page 7 of your return. Enter the ERDTOH at the end of the tax year on line 530 and at amount BB in the same area.

References
Subsections 129(3) and 186(5)

Dividend refund

Note 

For tax years starting before 2019, do this calculation on page 6 of the return. For tax years starting after 2018, do the calculation on page 7. For tax years starting after 2018, a private corporation's eligible dividends will generate dividend refunds from the ERDTOH, and non‑eligible dividends will generate dividend refunds from the NERDTOH first, then possibly from the ERDTOH. The calculation will effectively require a private corporation to get a refund from its NERDTOH account before it gets a refund from its ERDTOH account, when it pays a non‑eligible dividend. A transitional rule will preserve the refundability of a corporation's pre‑existing RDTOH.

A private or subject corporation may be entitled to a dividend refund for dividends it paid while it was a private or subject corporation, regardless of whether it was a private or subject corporation at the end of the tax year.

Note

To claim a dividend refund or to apply the amount to another debit for any tax year, including the same tax year, you have to file your income tax return within three years of the end of the tax year. If your income tax return is not filed within three years of the end of the tax year, the dividend refund becomes statute barred, and will not be issued.

A dividend refund arises if you pay taxable dividends to shareholders, and if there is an amount of RDTOH or, for tax years starting after 2018, an amount of NERDTOH or ERDTOH at the end of the tax year. To claim a dividend refund, you have to have made an actual payment to the shareholders, unless the dividend is considered paid (a deemed dividend).

You can make this payment either in cash, or with some other tangible assets at fair market value, including the following:

  • stock dividends
  • section 84 deemed dividends
  • amounts paid as interest or dividends on income bonds or debentures that are not deductible when calculating income

If you lose your private status following a change in control, a deemed year-end occurs. This allows you to claim a dividend refund for any dividends paid during the deemed short year.

You have to complete Parts 3 and 4 (if they apply) of Schedule 3 to claim a dividend refund.

For tax years starting before 2019, the dividend refund is equal to whichever of the following amounts is less:

  • 38 1/3% of taxable dividends that you paid in the year as a private or subject corporation
  • the RDTOH at the end of the tax year

For tax years starting after 2018, the dividend refund is equal to the total of the following amounts:

  • for eligible dividends, the amount (referred to below as amount 1) that is the lesser of 38 1/3% of the total of all eligible dividends you paid in the year and your ERDTOH account balance at the end of the year;
  • for non-eligible dividends, the total of the two following amounts:
    • the amount that is the lesser of 38 1/3% of the total of all non-eligible dividends you paid in the year and your NERDTOH account balance at the end of the year
    • the amount that is the lesser of:
    • – the amount, if any, by which 38 1/3% of the total of all non-eligible dividends you paid in the year is more than your NERDTOH account balance at the end of the year
    • – the amount, if any, by which your ERDTOH account balance at the end of the year is more than amount 1

The total of taxable dividends paid for the purpose of the dividend refund is equal to the amount on line 460 of Schedule 3. Refundable dividend tax on hand refers to the amount on line 485 in the “Refundable dividend tax on hand” area of your return. Eligible refundable dividend tax on hand refers to line 530 and non-eligible refundable dividend tax on hand refers to line 545.

Parts 3 and 4 of Schedule 3

The following explains how to complete Parts 3 and 4 of Schedule 3. See Parts 1 and 2 of Schedule 3 for explanations on the first two parts of the schedule.

If you paid taxable dividends during the year, complete Part 3 to identify taxable dividends that qualify for the dividend refund.

If the amount of dividends paid includes dividends that do not qualify for the dividend refund, you have to deduct these dividends before completing the calculation in Part 3. In this case, complete Part 4 of Schedule 3 to identify dividends that do not qualify.

Dividends that do not qualify are:

  • dividends paid out of the capital dividend account
  • capital gains dividends
  • dividends paid for shares that do not qualify as taxable dividends, because the main purpose of acquiring the shares was to receive a dividend refund [subsection 129(1.2)]
  • taxable dividends paid to a controlling corporation that was bankrupt at any time in the year

Complete Part 3 of Schedule 3 to identify a connected corporation that received taxable dividends that qualify for the dividend refund.

If the dividend refund is more than the amount of Part I tax payable for the year, we deduct the excess from any other taxes owed under the Income Tax Act. Any balance left over is available for a refund.

If the total dividends paid during the year is different from the total of taxable dividends paid for the purpose of the dividend refund, complete Part 4 of Schedule 3.

References
Section 129
Subsection 186(5)
Paragraph 129(1)(a)

Report a problem or mistake on this page
Please select all that apply:

Thank you for your help!

You will not receive a reply. For enquiries, contact us.

Date modified: