Tax Considerations for Investment Companies

Any Canadian Controlled Private Corporation (“CCPC”) in Canada that earns investment income (also referred to as passive income e.g., capital gains, dividends, etc.) is subject to certain tax regulations that will be discussed below:

The refundable portion of Part I tax:

In addition to regular corporate income tax levied on all corporation’s resident in Canada, any rental income, interest income, royalty income, taxable capital gains, and foreign income is subject to an additional refundable portion of Part I tax. This refundable part I tax is 30.67% of investment income.

The purpose of the refundable portion of Part I tax is to eliminate any tax advantage of earning investment income in a corporation. This tax is recoverable upon payment of taxable dividends from the corporation to its shareholders at a determined rate of 38.33 cents for each dollar of taxable dividends paid (limited to the balance in the Eligible or Non-eligible Refundable Dividend Tax on Hand (ERDTOH or NERDTOH) accounts.

Part IV tax

Dividends from Canadian corporations that are not connected to the shareholder corporation are subject to Part IV tax. The tax rate for Part IV tax is 38.33% of the dividend received. Corporations are connected with each other if one corporation owns more than 10% of the issued share capital (having full voting rights) of the other corporation which is also more than 10% of the fair market value of all of the issued shares of the capital stock of that corporation.

Like the refundable portion of Part I tax, Part IV tax is also fully refundable to the corporation when a taxable dividend is paid by the corporation to its shareholders. Generally, Part IV tax is only applicable on dividends paid between two connected corporations if a dividend refund was received by the payor corporation on payment of the dividends.

Refundable Dividend Tax on Hand:

On or after January 1, 2019, a new set of rules for Refundable Dividends Tax On Hand (“RDTOH”) have been applicable to all CCPCs. The new measures have divided the previous RDTOH account into the following:

• Eligible Refundable Dividend Tax On Hand (“ERDTOH”)
• Non-Eligible Refundable Dividend Tax On Hand (“NERDTOH”)

ERDTOH:

This account will track refundable taxes paid on eligible dividends received from corporations that are not connected, as well as eligible dividends received from connected corporations to the extent that these dividends triggered a dividend refund to the payor corporation. A refund of the ERDTOH account will be available on payment of eligible and non-eligible dividends.

NERDOTH:

This account will track the refundable taxes paid on investment income earned by the CCPC. A refund of the NERDTOH will only be available upon the payment of non-eligible dividends.

Dividend Refund:

A dividend refund is an amount that arises if a CCPC pays a taxable dividend to its shareholder, and if there is an amount of NERDTOH (for non-eligible dividends) and ERDTOH (for eligible and non-eligible dividends).

For eligible dividends, the dividend refund amount is lesser of 38.33% of the total of all eligible dividends paid in the year and the corporation’s ERDTOH balance at the end of the year.

For non-eligible dividends, the dividend refund is the total of the two following amounts:

1. The amount that is lesser of 38.33% of the total non-eligible dividends paid in the year and the corporation’s NERDTOH account balance at the end of the year.
2. The amount that is lesser of:
   • Any amount by which 38.33% of the total non-eligible dividends paid in the year is more than the corporation’s NERDTOH balance at the end of the year.
   • Any amount by which the corporation’s ERDTOH balance at the end of the year is in excess of the amount calculated for point 1.

Capital Dividend Account (CDA):

The CDA accumulates the non-taxable portion of capital gains and losses. A positive balance in the CDA can be paid out to the shareholders as a tax-free capital dividend. Capital dividend payments are not included in the shareholder’s income. Transactions like the realization of capital gains, and tax-free death benefit from a corporate-owned life insurance policy result in an addition to the CDA. Realized capital losses cause a reduction in the CDA balance.

Conclusion:

A business can take advantage of using the Quick Method of GST as described above. To complete an analysis of your business if it meets the criteria listed above, please contact us.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.