July 2015 Newsletter

Where a Canadian corporation receives a dividend from another Canadian corporation, the dividend is included in the recipient corporation’s income but is normally deducted from income in computing its taxable income. In other words, inter-corporate dividends generally pass from one corporation to another corporation on a tax-free basis.

The rationale for this treatment is that dividends are paid out of after-tax income, and taxing the dividend in the hands of the recipient corporation would constitute double taxation. For example, if you own a parent corporation that owns a subsidiary corporation, business income earned by the subsidiary is subject to tax. If the subsidiary paid a dividend to your parent corporation and it was taxable, there would be double tax. In the case of multi-tiered corporate structures (e.g. your subsidiary owns another subsidiary, and perhaps that other subsidiary owns yet another subsidiary), there could be triple tax, or quadruple taxation, or worse.

Despite the “intercorporate dividend deduction”, if your corporation receives a dividend from a corporation that is not “connected” with your corporation, it may be subject to a refundable tax under Part IV of the Income Tax Act. The purpose of this tax is to prevent individuals from deferring tax on dividends from public corporations (informally called “portfolio dividends”). Basically, a non-connected corporation is a corporation that is not controlled by your recipient corporation, and your corporation owns 10% or less of the shares of the payer corporation on either a voting or fair market value basis. This will virtually always be true for dividends from public corporations that you buy on the market.

The Part IV tax is levied at the rate of 33.33% of taxable dividends received by your recipient corporation from a non-connected corporation. However, the tax is refundable, generally on a basis of $1 for every $3 of dividends that your corporation pays out.


Your wholly-owned corporation owns common shares in Bell Canada (obviously, far less than 10% of the outstanding shares of Bell!). In 2015, it receives a $1,000 taxable dividend from Bell.

The dividend is included in income and then deducted in computing taxable income, so it has no net effect on your corporation’s income.

The Part IV tax is $333. However, if your corporation pays you a dividend of $1,000 in 2015, the $333 is refundable so that your corporation pays no net tax. If it waits until 2016 to pay the dividend, it will pay the tax in 2015 but will get the refund in 2016.

The Part IV tax does not apply to dividends received from a connected corporation, except to the extent the connected corporation gets a refund of tax for dividends received by it. If it does get such a refund, then your corporation is generally subject to the Part IV if it receives dividends from the connected corporation.


Your corporation owns 100% of the shares of a connected corporation and both have calendar year ends. In 2015, the connected corporation pays a $1,000 dividend to your corporation.  The connected corporation claims a dividend refund of $333 (it received a $1,000 dividend from a public corporation, which it then paid out to your corporation). Your corporation will be subject to $333 Part IV tax, which is refundable if it pays out a dividend to you, as discussed above.

If your corporation owned less than 100% of the shares of the connected corporation, its Part IV tax would be pro-rated based on the amount of dividends it received relative to other shareholders in the connected corporation. For example, if your corporation received a $600 dividend and other shareholders received $400, your corporation would be subject to a refundable tax of $200 (60% of the $333 refund of the connected corporation).

The Part IV tax can also be offset by ⅓ of your corporation’s non-capital losses, including those carried over from other taxation years. A non-capital loss is basically the corporation’s losses from business or property in excess of income from business or property for a taxation year (with possible adjustments).

Last modified on July 31, 2015 12:00 am
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