The changes will affect certain key forms that need to be filed:
- T2 Schedule 3, which reconciles dividends received, taxable dividends paid, and Part IV tax calculations;
- T2 Schedule 53, which reconciles the flows within the Generate Rate Income Pool (GRIP) that determine what can be paid as eligible dividends reported on the T5 return;
- T2 Schedule 54, which reconciles the flows within the Low Rate Income Pool (LRIP) that determine what can be paid as non-eligible dividends similarly reported; and
- page 7 of the T2 return, concerning the determination of RDTOH and dividend refunds for the year.
This is important, as eligible dividends paid from GRIP, because of the "gross-up and credit" system of reporting taxable dividends, are more or less accounted for on the individual T1 returns with minimal impact on the overall tax collected when you add the effects of personal and corporate taxes together. Non-eligible dividends paid from LRIP will result in being effectively marginally taxed at the personal level. Until now, if there were balances in both pools there was no rule governing which pool had to be drawn upon first for paying dividends to shareholders.
Beginning with the first taxation year after 2018, the RDTOH will be divided into two accounts:
- The current account will be designated as "non-eligible RDTOH".
- A new account, to be known as "eligible RDTOH", will be created.
- Where a corporation is a CCPC throughout that first year, an opening balance will be created for eligible RDTOH equal to the lesser of a) its RDTOH at the end of the previous year, and b) 38⅓% of its GRIP at the same date. An anti-avoidance provision will be in effect to prevent any manipulation concerning the opening balance.
- Otherwise, additions to eligible RDTOH will arise from Part IV tax on "eligible portfolio dividends", which are dividends received from a) corporations with which the corporation is not connected under ITA s. 186(4), and b) connected corporations paying dividends from their own eligible RDTOH accounts.
Why is that necessary? It is because of the rules that will also come into force with respect to obtaining dividend refunds relating to Part IV tax and the refundable portion of Part I tax paid in previous years that had already flowed into the RDTOH:
- If a corporation pays an eligible dividend, it will not be able to obtain a dividend refund unless it has a positive balance for eligible RDTOH.
- If it pays a non-eligible dividend, it will obtain a dividend refund as long as there is a positive balance in either RDTOH account.
- The non-eligible RDTOH account must be depleted before a dividend refund can be obtained with respect to its eligible RDTOH account.
Why does this matter?This is related to Ottawa's efforts to ensure that passive income within corporations is properly taxed when it flows back to individual shareholders. The current régime which provided for a single RDTOH pool was inconsistent with that goal, so it had to be dividend to ensure that taxation was occurring properly with respect to each source of investment income occurring for the corporation. This change was both necessary and desirable.
Penalties will still exist for eligible dividends paid that are in excess of available GRIP for the year, reported as Part III.1 tax on T2 Schedule 55. Therefore, several different sets of forecast and other calculation scenarios will be necessary before directors decide to declare any relevant dividends. Another reason to have a very good CFO at your side.
None of these changes affect the existing rules concerning the capital dividend account, out of which tax-free capital dividends can be paid, but it is still necessary to maintain up-to-date calculations as to what the eligible balance is. The relevant forms for this exercise are T2 Schedule 89 and T2054, mailed together to the office stated in the instructions, on or before the date the dividend is first paid or payable.. The corporation's auditors should have already compiled the necessary information, if it is not already available internally.