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

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• Refundable portion of Part I tax
  • Lines 440, 445, and 450
• Refundable dividend tax on hand
  • Lines 530 and 545
• Dividend refund
  • Parts 3 and 4 of Schedule 3

Refundable portion of Part I tax

Lines 440, 445, and 450

The refundable portion of Part I tax is part of the non-eligible refundable dividend tax on hand (NERDTOH). More information about NERDTOH 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.

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 years starting after 2018, enter the amount from line 450 at amount H in the “Refundable dividend tax on hand” area on page 7 of your return.

References
Subsection 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

The calculation of a private corporation's dividend refund is based on two accounts, the eligible refundable dividend tax on hand (ERDTOH) and the non-eligible refundable dividend tax on hand (NERDTOH).

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

Lines 530 and 545

The ERDTOH and NERDTOH accounts only apply to corporations that were private or subject corporations.

A CCPC generates NERDTOH on the refundable portion of Part I tax it pays on investment income, and both ERDTOH and NERDTOH 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 ERDTOH and NERDTOH.

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 ERDTOH and NERDTOH 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 the eligible and non-eligible refundable dividend tax on hand balances using the "View return balances" service through:

• My Business Account, if you are the business owner
• Represent a Client, if you are an authorized representative or employee

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

• the ERDTOH balance at the end of the previous tax year (minus any dividend refund from ERDTOH issued to the corporation in the previous year) (line 520 minus amount G)
• any balance of ERDTOH transferred from a predecessor corporation on amalgamation, or from a wound‑up subsidiary corporation (line 525)
• Part IV taxes payable (amount Q) on:
  • eligible dividends received from non-connected corporations
  • taxable dividends received from connected corporations to the extent that the payment of the dividends caused a dividend refund to the payer corporation from its ERDTOH

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

• the NERDTOH balance at the end of the previous tax year (minus any dividend refund from NERTDOH issued to the corporation in the previous year) (line 535 minus line 575)
• the refundable portion of Part I tax (line 450)
• any balance of NERDTOH transferred from a predecessor corporation on amalgamation, or from a wound‑up subsidiary corporation (line 540)
• Part IV tax payable (excluding amounts allocated to ERDTOH) (amount P)

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.

Enter the ERDTOH at the end of the tax year on line 530 and at amount BB in the “Dividend refund” area on page 7 of your return. Enter the NERDTOH at the end of the tax year on line 545 and at amount EE in the same area.

References
Subsections 129(4) and 186(5)

Dividend refund

A private corporation's eligible dividends generate dividend refunds from the ERDTOH. Non‑eligible dividends generate dividend refunds from the NERDTOH first, and then possibly from the ERDTOH. The calculation effectively requires 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 dividend refund arises if you pay taxable dividends to shareholders, and if there is 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

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. 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.

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 in the tax year that qualify for a dividend refund is equal to the amount on line 460 of Schedule 3. Eligible refundable dividend tax on hand refers to line 530 of the return 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, the CRA deducts 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)

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