I have not been involved with an investment corporation for many years. I remember that we included note to the FS for refundable taxes showing RDTOH at year-end and that a dividend was available at the rate of $1 for $3 of taxable dividends declared. I realize that rules have changed since then. Does anyone have a sample of an updated note?
I’ve never seen or used such a note disclosure. Where would such a requirement come from? CPA? In any case, not relevant for T2 filing, because FS notes are not always required.
I remember putting those notes in Review Engagement statements. It’s not a bad item to show in the notes but not seen much since the average investment company doesn’t have Review Engagement statements done.
I remembered seeing few actually recorded in equity section, not just note disc. I thought that’s kind of nice. Not sure what the original entry would look like. If a corporation has a larger NERDTOH, but retained earning is nil or negative, that could happen, the corporation would have problem getting the refund?
I typically put it in the client letter:
• Eligible Refundable Dividend Tax On Hand (ERDTOH) - The company has eligible refundable dividend taxes on hand of $2,363. This amount is refundable when the company pays out a eligible dividend, at a rate of 38 1/3% of the dividend paid.
• Non-Eligible Refundable Dividend Tax On Hand (NERDTOH) - The company has non-eligible refundable dividend taxes on hand of $2,632. This amount is refundable when the company pays out a non-eligible dividend, at a rate of 38 1/3% of the dividend paid.
• General Rate Income Pool (GRIP) - The company has a balance of $6,164 in its General Rate Income Pool, This means the company may pay out this amount in eligible dividends, which receive preferential personal income tax treatment.
• Capital Dividend Account - The company has a balance of $20,534 in its capital dividend account. This amount may be paid out as dividends, which will be tax-free to the recipients.
• Non-Capital Losses - The company has non-capital losses of $935 available for carryforward.
A dividend refund has nothing to do with the company’s retained earnings balance. The only issue might be whether the company is legally able to declare dividends if it doesn’t have retained earnings. That should be based on the legislation it was incorporated under. I don’t know if there are any provinces that require retained earnings to declare a dividend. In New Brunswick the requirement is solvency which is irrespective of retained earnings. I am not a lawyer of course, etc, etc.
It seems logical that “no retained earning” means no tax paid earning available for a dividend on which the recipient gets a tax credit “for tax previously paid’. But I couldn’t find anything that spells that out. When I called CRA I was told “Obviously you can’t pay a dividend out as tax paid earnings when there are none”, but the person I spoke to could not point to anything that specifically said ‘No”.
Retained earnings is an accounting concept, not a tax concept. A random CRA agent you get on the phone about this will not be qualified to address the question.
Things get complicated over the years, no tax paid, no refund, that seems logical, but obvious, if there is NERDTOH, there was taxes paid, there would be retained earning at the time the taxes were paid, but over the year, it was reduced due to losses, dividends etc… There is where safe income calculation is the key to keep the book straight, but without those record keeping, it would be difficult to say yes or no. So recording in note or even in the equity seciton, seems to be the easiest method to keep track
For years, the Ontario Business Corporations Act said that you could pay dividends to the extent to which, after liquidating the company and paying any liabilities, the company had net assets. I’ve never seen CRA challenge dividends paid where this may not be the case. I think that provision is more one that a shareholder or bank may use to keep assets in the company.
A lot of the time, many of the technique that we see, and others follow, may not be allowed by CRA, CRA accepted something, doesn’t mean it’s right. They can always use their interpretation to overrule. Unless a ruling were obtained