Refundable dividend tax on hand

How the accounts build up

A CCPC adds to its non-eligible account (NERDTOH) with the refundable portion of Part I tax paid on investment income. Both accounts also grow from Part IV tax on certain dividends the corporation receives. Other private corporations build the accounts only through Part IV tax. Each year’s closing balance equals the prior balance less any dividend refund received, plus new additions and any amounts moved in on an amalgamation or wind-up.

The balances appear on the T2 return, as line 530 for the eligible account and line 545 for the non-eligible one. The business owner can view them through My Business Account, and an authorized representative can do so through Represent a Client.

How a refund is triggered

Paying a taxable dividend is what releases the tax. Eligible dividends draw only on the eligible account. Non-eligible dividends draw on the non-eligible account first and then, if that is exhausted, on any remaining eligible balance. In each case the refund is the lesser of 38 1/3% of the relevant dividends and the account balance.

Some dividends do not qualify, including dividends paid out of the capital dividend account, capital gains dividends and dividends on shares acquired mainly to obtain a refund. The refund is claimed on Schedule 3 of the T2 return, so the return has to be filed, and the CRA says the refund is barred if the return is not filed within three years of the tax year end.

An illustrative example

Suppose a corporation ends the year with $5,000 in its non-eligible account, nothing in its eligible account, and pays its shareholder a $10,000 non-eligible dividend. 38 1/3% of $10,000 is about $3,833, which is below the balance, so the refund is about $3,833 and roughly $1,167 stays in the account. Had the dividend been $20,000, the cap would have been the $5,000 balance. These numbers are simplified and ignore the shareholder’s own personal tax on the dividend.

What to discuss with your accountant

Ask for the current balance in each account and how dividend timing would change the refund. Bring last year’s notice of assessment, Schedule 3 and records of any investment income or dividends the company received. Discuss the personal tax cost of the dividend alongside the corporate refund, because the combined result, not the refund alone, should guide the decision.