Question

Part I And Part IV Refundable Taxes

Warron Inc. is a Canadian controlled private corporation. It has a December 31 year end. The following information relates to its 2017 taxation year.

1.    At the end of 2016, the Company’s Refundable Dividend Tax On Hand balance was $19,400. The 2016 dividend refund was $7,100.

2.    Warron Inc. paid taxable dividends of $53,250 during the year.

3.    Warron Inc. owns 35 percent of the voting shares of Delux Inc., another CCPC with a December 31 year end. During 2017, Delux Inc. paid taxable dividends of $48,600. As a consequence of paying these dividends, Delux Inc. received a dividend refund of $14,400.

4.    Warron Inc. is associated with several other corporations. Warron has been allocated $64,000 of the associated group’s annual business limit. This amount is significantly less than the Company’s active business income for 2017.

5.    During 2017, Warron Inc. has Taxable Income of $365,100. Assume that Part I Tax Payable for the year was correctly calculated to be $69,440. These totals do not include any foreign source income and no net capital losses were deducted during the year.

6.    Other income that was reported by Warron Inc. consisted of the following amounts:

Capital Gain                                                                                                         $71,200

Eligible Dividends From Power Corporation Preferred Shares         19,200

Net Rental Income From Residential Properties                                    13,200

Required: For the taxation year ending December 31, 2017, determine the Part IV and refundable Part I taxes that will be payable by Warron Inc. In addition, determine the balance in the Refundable Dividend Tax On Hand account at December 31, 2017, and any dividend refund available. Show all of the calculations used to provide the required information, including those for which the result is nil.

Answer 1

Calculation of Part IV tax – subsection 186(1)

Computation of Dividend Refund

A payer corporation’s “dividend refund” is defined in paragraph 129(1)(a) to be the LESSER of

(a) 1/3 of all taxable dividends paid by the corporation in its taxation year and at a time when it was a private corporation, and

(b) its “refundable dividend tax on hand” (“RDTOH”) at the end of its taxation year.

that is:-

1) 1/3rd of taxable dividend paid is ($53,250/3) = $17,750

2)  Refundable Dividend Tax On Hand is $19,400

Dividend Refund Amount is $17,750

• Dividend is taxable which is received from connected undertaking $14,400

the determination of whether an assessable dividend was received from a “connected” corporation must be made at the time that the dividend was received by the recipient corporation. If the assessable dividend was received from the payer corporation at a time when that corporation was not connected to the recipient corporation, then the dividend is subject to Part IV tax as described in, notwithstanding that the payer corporation may have been connected to, or might subsequently become connected to, the recipient corporation at some other time during the taxation year.

Connected means

Pursuant to subsection 186(4), a payer corporation is “connected” with the recipient corporation at a particular time where (a) the recipient corporation controls the payer corporation (otherwise than by virtue of a right referred to in paragraph 251(5)(b)) at that time, or (b) the recipient corporation owns, at the particular time, (i) more than 10% of the issued share capital (having full voting rights under all circumstances) of the payer corporation, and (ii) shares of the payer corporation having a fair market value greater than 10% of the fair market value of all the issued shares of the payer corporation.

Part IV.1 levies a tax on certain dividends received on “taxable preferred shares” (defined in subsection 248(1)). Generally, a taxable preferred share will include most preferred shares issued after June 18, 1987.

So, Eligible Dividends From Power Corporation Preferred Shares that is $19,200 is taxable dividend.

Canadian-controlled private corporations claiming the small business deduction, the net tax rate is 10%.

Balance at the beginning

Refundable Dividend Tax On Hand balance $19,400

Less : Dividend Refund $7,100

Balance at beginning of 2017 is $12,300($19400-$7100)

50% of Investment income ($71,200+$13,200) = $84,400 * 50% = $42,200

30.67% of such income proportion is $12,942.74 added to Refundable Dividend Tax On Hand Account

So, At the end balance is $25,242.74($12,942.74+$12,300).