T2 Corporation – Income Tax Guide – Chapter 6: Pages 6 and 7 of the T2 return (2024)

From: Canada Revenue Agency

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• Refundable portion of PartI tax
  • Lines440,445, and450
• Refundable dividend tax on hand
  • Lines 530 and545
• Dividend refund
  • Parts3 and4 of Schedule3

Lines440,445, and450

The refundable portion of Part I tax is partof the non-eligible refundable dividend tax on hand (NERDTOH). More information about NERDTOH is in the sectionthat follows.

The refundable portion of Part I tax allows a CCPC that has paid Part I tax on investment income to recover partof that tax when the corporation pays taxable dividends to its shareholders. The refundable portion of Part I tax only applies to corporations that are CCPCs throughout the tax year.

The refundable portion of Part I tax is based on the aggregate investment income and foreign investment income. You have to determine these amounts by completing Parts1 and3 of Schedule7, Aggregate Investment Income and Income Eligible for the SmallBusiness Deduction.

Part1– Aggregate investment income calculation

The aggregate investment income is the aggregate world source income calculated as follows:

add

• the eligible portion of the taxable capital gains for the year that is more than the total of:
  • the eligible portion of allowable capital losses for the year
  • the net capital losses from previous years which are applied in the year
• total income from property(including income from a specified investment business carried on in Canada other than income from a source outside Canada) from which the following amounts have been deducted:
  • exempt income
  • AgriInvest receipts(include the Quebec amount)
  • taxable dividends deductible after deducting related expenses
  • business income from an interest in a trust that is considered property income under paragraph108(5)(a)

deduct

• total losses for the year from property(including losses from a specified investment business carried on in Canada other than losses from a source outside Canada)

On line440 enter the amount of aggregate investment income that you determined on line092 of Schedule7.

You can include taxable capital gains and allowable capital losses in a CCPC's net investment income only if you can attribute the gain or loss to a period of time when a CCPC, an investment corporation, a mortgage investment corporation, or a mutual fund corporation held the disposed property.

Part3– Foreign investment income calculation

The foreign investment income is all income from only sources outside of Canada calculated as follows:

add

• the eligible portion of the taxable capital gains for the year that is more than the eligible portion of allowable capital losses for the year
• the total income from property from a source outside Canada from which the following amounts have been deducted:
  • exempt income
  • taxable dividends deductible after deducting related expenses
  • business income from an interest in a trust that is considered property income under paragraph108(5)(a)

deduct

• the total losses for the year from property from a source outside Canada

On line445 enter the amount of foreign investment income that you determined on line079 of Schedule7.

Calculate the amount of the refundable portion of Part I tax. For years starting after2018, enter the amount from line450 at amountH in the “Refundable dividend tax on hand” area on page7 of your return.

References
Subsection 129(4)
IT‑73, The Small Business Deduction
IT‑269, PartIV Tax on Taxable Dividends Received by a Private Corporation or a Subject Corporation

The calculation of a private corporation's dividend refund is based on two accounts, the eligible refundable dividend tax on hand(ERDTOH) and the non-eligible refundable dividend tax on hand(NERDTOH).

For more information on eligible dividends, go to Eligible dividends or Line 710 – Part III.1 tax payable.

Lines 530 and 545

The ERDTOH and NERDTOH accounts only applyto corporations that were private or subject corporations.

A CCPC generatesNERDTOHon the refundable portion ofPart I tax it pays on investment income, and both ERDTOH and NERDTOHon the Part IV tax it pays on dividends it receives. For any other type of private corporation, only the Part IV tax it pays generatesERDTOH and NERDTOH.

For more information on taxable dividends deductible under section112 or113, or subsection138(6), see Line320.

For information on Part IV tax and instructions to complete Schedule3, Dividends Received, Taxable Dividends Paid, and Part IV Tax Calculations, see line712– PartIV tax payable.

All or partof the ERDTOH and NERDTOHat the end of the tax year is available as a refund if the corporation pays taxable dividends to the shareholders during the tax year.

You can view the eligible and non-eligible refundable dividend tax on hand balances using the "View return balances" service through:

• My Business Account, if you are the business owner
• Represent a Client, if you are an authorized representative or employee

To calculate theERDTOHat the end of the tax year, addthe following amounts:

• the ERDTOH balance at the end of the previous tax year (minus any dividend refund from ERDTOH issued to the corporation in the previous year) (line520 minus amountG)
• any balance of ERDTOH transferred from a predecessor corporation on amalgamation, or from a wound‑up subsidiary corporation (line525)
• PartIV taxes payable (amount Q) on:
  • eligible dividends received from non-connected corporations
  • taxable dividends received from connected corporations to the extent that the payment of the dividends caused a dividend refund to the payer corporation from its ERDTOH

To calculate the NERDTOH at the end of the tax year, addthe following amounts:

• the NERDTOH balance at the end of the previous tax year (minus any dividend refund from NERTDOH issued to the corporation in the previous year) (line535 minus line575)
• the refundable portion of PartI tax (line450)
• any balance of NERDTOH transferred from a predecessor corporation on amalgamation, or from a wound‑up subsidiary corporation (line540)
• PartIV tax payable (excluding amounts allocated to ERDTOH) (amountP)

Enter the amounts transferred as a result of an amalgamation or the wind-up of a subsidiary on line525 for theERDTOH and on line540 for the NERDTOH.

Enter theERDTOH at the end of the tax year on line530 and at amountBB in the “Dividend refund” area on page7 of your return. Enter theNERDTOHat the end of the tax year on line545 and at amountEE in the same area.

References
Subsections129(4) and186(5)

You can make this payment either in cash, or with some other tangible assets at fair market value, including the following:

• stock dividends
• section84 deemed dividends
• amounts paid as interest or dividends on income bonds or debentures that are not deductible when calculating income

A private or subject corporation may be entitled to a dividend refund for dividends it paid while it was a private or subject corporation, regardless of whether it was a private or subject corporation at the end of the tax year. If you lose your private status following a change in control, a deemed year-end occurs. This allows you to claim a dividend refund for any dividends paid during the deemed short year.

You have to complete parts3 and4(if they apply) of Schedule3 to claim a dividend refund.

The dividend refund is equal to the total of the following amounts:

• for eligible dividends, the amount (referred to below as amount 1) that is the lesser of 38 1/3% of the total of all eligible dividends you paid in the year and your ERDTOH account balance at the end of the year
• for non-eligible dividends, the total of the two following amounts:
  • the amount that is the lesser of 38 1/3% of the total of all non-eligible dividends you paid in the year and your NERDTOH account balance at the end of the year
  • the amount that is the lesser of:
    • the amount, if any, by which 38 1/3% of the total of all non-eligible dividends you paid in the year is more than your NERDTOH account balance at the end of the year
    • the amount, if any, by which your ERDTOH account balance at the end of the year is more than amount 1

The total of taxable dividends paid in the tax year that qualify for a dividend refund is equal to the amount on line 460 of Schedule 3. Eligible refundable dividend tax on hand refers to line 530of the return and non-eligible refundable dividend tax on hand refers to line 545.

Parts3 and4 of Schedule3

The following explains how to complete Parts3 and4 of Schedule3. See Parts1 and2 of Schedule3 for explanations on the first two parts of the schedule.

If you paid taxable dividends during the year, complete Part3 to identify taxable dividends that qualify for the dividend refund.

If the amount of dividends paid includes dividends that do not qualify for the dividend refund, you have to deduct these dividends before completing the calculation in Part3. In this case, complete Part4 of Schedule3 to identify dividends that do not qualify.

Dividends that do not qualify are:

• dividends paid out of the capital dividend account
• capital gains dividends
• dividends paid for shares that do not qualify as taxable dividends, because the main purpose of acquiring the shares was to receive a dividend refund [subsection129(1.2)]
• taxable dividends paid to a controlling corporation that was bankrupt at any time in the year

Complete Part3 of Schedule3 to identify a connected corporation that received taxable dividends that qualify for the dividend refund.

If the dividend refund is more than the amount of Part I tax payable for the year, the CRA deducts the excess from any other taxes owed under the Income Tax Act. Any balance left over is available for a refund.

If the total dividends paid during the year is different from the total of taxable dividends paid for the purpose of the dividend refund, complete Part4 of Schedule3.

References
Section129
Subsection186(5)
Paragraph 129(1)(a)

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