53 What is the Refundable Part IV tax and how is it determined? Why does it exist?

Refundable Part IV tax applies to certain dividends received by private corporations in Canada.  It is intended to prevent some corporate tax deferral opportunities as well as addressing double taxation problems that might occur when dividends are paid from corporation to corporation.  It even ties into the overall tax concept of integration.

• Dividends Received from “portfolio dividends” from non-connected corporations (own less than 10% of voting shares): Part IV tax equals 38 1/3% of the total dividend received.
• Dividends received from connected corporations (own more than 10% of voting shares): Part IV tax equals the recipient’s ownership % of the payor corporation x the dividend refund received by the payor corporations

Example: Opal Ltd., a Canadian controlled private corporation, received the following amounts of dividends during the year ending December 31, 2020

• Dividends on Various Portfolio Investments: $14,000
• Dividends on Emerald Inc: $41,500
• Dividends From Ruby Inc: $18,000

Opal Ltd. Owns 100 percent of the voting shares of Emerald Inc. and 30 percent of the voting shares of Ruby Inc. (which approximates the fair value of Opal’s ownership as well).  As a result of paying the $60,000 dividend, Ruby Inc. received a dividend refund of $15,000. Emerald Inc. received no dividend refund for its dividend payment.

How much Part IV Tax must Opal Ltd. pay as a result of receiving these dividends?

Solution:

The amount of Part IV Tax Payable would be calculated as follows:

• Tax On Portfolio Investments [38-1/3%) ($14,000)]   $5,367
• Tax on Emerald Inc. Dividends                                          $Nil
• Tax On Ruby Inc. Dividends [(30%) (15,000)]               $4,500
• Part IV Tax Payable                                                          $9,867

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