Refundable Dividend Tax On Hand

[Griet van Vliet]

But no discussion of RDTOH, nor of dividend tax refund, would be complete without Part IV tax. Here it was made up of two parts:

Tax refund to the subsidiary 14,000
Portfolio dividends: 17,500*38-1/3% = 6,708

Total Part IV tax 20,708

Opening RDTOH balance 5,200
Refundable portion of Part I tax 17,121
Part IV tax 20,708
Dividend refund from previous year Nil
Ending RDTOH balance 43,029

Dividend tax refund: 38-1/3%*92,000 = 35,267

Therefore the final balance owing (or refund), given 8,000 every quarter in installment payments, is:

Part I tax payable 42,103
Part IV tax 20,708
Less: Dividend refund 35,267
Less: FNBTC 2,000
Less: Installment payments 32,000

Tax refund 6,456

 

[Griet van Vliet]

And then comes a new client that comes to her for tax planning advice. The facts of the case: that Ottawa clan elder has 200,000 to invest. His marginal total tax rate is 43%, the total dividend tax credit is 100% of the grossup. The choice: either have the one-year, 4% bond investment in a personal capacity or have OttawaFaux hold it and pay dividend on any after-tax money left.

Personal basis after-tax retention: 200,000 * 4% * 57% = 4,560

If OttawaFaux held it: 8,000 in interest, Part I tax (inclusive of ART) is 45% of that = 3,600 as income tax expense, so 4,400 before any dividend tax refund. Now, RDTOH considerations makes it so that 4,400 is not the end of the story. Because of the RDTOH considerations, the net amount of tax paid is only 14-1/3% so the journal entry is Dr. Retained earnings 6,853, Dr. Current tax expense 1,147, Cr. Cash 8,000.

Now, what's happening with the dividend: a check for 6,853, a 16% gross-up (the rate has changed somewhat) of 1,096 so the taxable dividend is 7,949, the income tax payable on that 7,949 is 3,418, but then the whole 1,096 must be removed as a dividend tax credit. Therefore the net tax payment is 2,322. The net after-tax retention is 4,531 so the clan elder should buy the bond on a personal basis.

 

[Griet van Vliet]

So here Oliver Co. acquired 100% of Arman Inc some 34 years ago, and decides to wind up Arman. From their segmented financial statements, the tax cost of the assets as at the end of the second quarter is 180,000, its PUC is 10,000, its ACB is 220,000 (and hence bought it for this much), its liabilities are 40,000, and the total dividends paid from Y to X have been only 15,000. Other balance sheet notes include the following:

Asset | Acquired | FMV at acquisition | Cost
Land 1 | 23 years ago | N/A | 10,000
Land 2 | 39 years ago | 45,000 | 20,000
Investments | 38 years ago | 90,000 | 40,000

So Oliver is deemed to have sold the Arman shares for the greater of the following: the lesser of the PUC, 10,000 and tax cost of equity, 140,000, and the ACB of the shares, also the deemed proceeds of disposition, 220,000. Now Oliver may be allowed to bump up assets received from the subsidiary by the ACB minus the net tax cost of equity and cumulative dividends, so 80,000 less 15,000 = 65,000. But only if they held the assets both at acquisition and now, and only up to the total value of the FMV at acquisition. Since Oliver intends to sell the investments first, then the full 50k is used on the investments, for a revised ACB of 90k, and the land gets the remaining 15k, so the revised ACB is 35k.