TSG (Tax Specialist Group) - Non-Refundable Dividend Tax On Hand (RDTOH)

The dividend refund mechanism is an important component of the integration concept in Canadian tax. To the extent a private Canadian corporation has refundable dividend tax on hand (RDTOH), it receives a refund of RDTOH at the rate of $1 for every $3 of dividends it pays out. This is called the “dividend refund.” This refund is often thought of as automatic, but the CRA has begun to deny the refund in certain circumstances.

Under the Income Tax Act, in order to receive the refund, the payor corporation must file its tax return for the year within three years after the end of that year. If a tax return is filed more than three years after the end of the year in which the dividend was paid, the CRA has now begun to deny the dividend refund.

The denial of the dividend refund cannot be reversed under the Taxpayer Relief measures and yields a harsh result. The individual shareholder will have paid personal tax on the dividend, the corporation will pay tax to the extent of the denied dividend refund, and the CRA will assess interest and late filing penalties to the corporation. By the time the assessments roll in the result can be the equivalent of “triple tax.”

There is little mention of this three-year time limit outside of the actual provision in subsection 129(1) of the Income Tax Act. The T2 Guide mentions that refunds should be claimed within three years in general, but it does not make specific reference to the denial of the dividend refund. The small business guide does not discuss the potential denial of refunds based on filing more than three years late. Further, the interpretation bulletin on dividend refunds does not mention the denial from late filing. Now, without warning, it seems that the CRA has chosen to assess according to the Act. Previously, the CRA seemed to be more lenient.

While most corporate tax returns are not filed more than three years after the year-end, these circumstances do arise. When analyzing the impact of filing a corporate tax return late, do not just consider penalties and interest. You may determine that there will be no penalties and interest due to there being no balance of tax owing. If the nil balance is due to a dividend refund, filing past the three year limit could have draconian results. Note also that a “regular” refund due to overpaid instalments will also be denied if the corporation files its return more than three years after the year-end (subsection 164(1)).

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