51 What is the Additional Refundable Tax and how is it determined? Why does it exist?

The Additional Refundable Tax (ART) is a refundable tax on the investment income of a Canadian Controlled Private Corporation (CCPC). The ART was introduced to ensure that federal/provincial tax on investment income was high enough to discourage the use of corporations to save taxes on passive income.  Basically, the government would like excess income to be flushed out to shareholders or reinvested in business activities rather than sitting passively in a corporation.

To successfully discourage the use of corporations to save taxes on passive income, the combined tax rate for corporations had to be higher (at least temporarily, before dividend refunds) than the rate applicable to high net worth individuals.

Per ITA 123.3, the ART is calculated as 10 2/3% of the lesser of:

• Corporations “aggregate investment income” for the year
• The amount, if any, by which the corporations Taxable Income for the year exceeds the amount that is eligible for the Small Business Deduction.

The ART becomes part of the Refundable Dividend Tax on Hand balance (to be discussed later in this book) and is refunded to the corporation when sufficient dividends have been paid out.  So, in many ways, the ART is a temporary tax intended to encourage corporations to pay out excess funds to shareholders.

Interactive content (Author: Karshigul Turdimuradova, January 2020)

Interactive content (Author: Rachel Magdanz, January 2020)

References and Resources:

• Article – “T2 Corporation – Income Tax Guide – Chapter 7: Page 8 of the T2 return” (Author: Government of Canada)
• “Canadian Tax Principles”, 2016-2017 edition, authors: Byrd and Chen, publisher: Pearson, p. 608-609.
• ITA 123.3

January 2020