T2 Schedule 3 - ERDTOH

I think I’ve come across a bug on T2 Schedule 3, when dealing with intercorporate dividends between connected corporations, and the new RDTOH regime.

Take this example:
An operating company (Opco) pays \$500,000 of dividends to its shareholders during the year. One of the Holdco’s (Holdco) receives a \$100,000 eligible dividend. The rest of the shareholders received non-eligible dividends totaling \$400,000. Opco receives a dividend refund of \$191,667, of this amount, \$38,333 is refunded from ERDTOH, and \$153,334 is refunded from NERDTOH.

Holdco will pay Part IV tax on it’s dividend received of \$38,333, which is \$100,000/\$500,000 x \$191,667. Tax Cycle calculates this correctly. Holdco should also get a \$38,333 addition to its ERDTOH account, and this is where things seem to go off. On Schedule 3, Part 1 Box I.1 asks for the dividend refund of Opco related to the taxable dividend received by Holdco (i.e. their portion), but only the portion paid from ERDTOH. So I input \$38,333 in that box.

Box 2E in Part 2 goes on to calculate the addition to the Holdco’s ERDTOH for the year. But it’s only calculating \$7,667, and I believe it should be \$38,333. Tax Cycle’s calculation is \$38,333/\$191,667 x \$38,333. I think it should just be pulling the amount directly from box I.1 in Part 1.

example ERDTOH.pdf (88.8 KB)

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I think you’ll find you have to enter the entire RDTOH that Opco earned on its total taxable dividends paid. The calculation will then work as intended.

@brian1

I think I see what the issue is.

You are correct that currently TaxCycle is calculating amount 2E to be \$38,333/\$191,667 x \$38,333. What we are trying to achieve with this proration calc is to figure out the addition to ERDTOH for the portion of Part IV tax that is related to the the dividend refund received by the connected payer corporation from its ERDTOH. (Definition of “Eligible Refundable Dividend Tax On Hand” under ITA 129(4)(a)(ii)).

Now, since the entire Part VI tax of \$38,333 already represents that portion related to the the dividend refund received by the connected payer corporation from its ERDTOH, line 2E should simply be \$38,333.

I will make this correction right away. I hope my explanation is not too confusing.
The workaround would be the suggestion made above by @jhd.hemeon (Thank you!)

My apologies for the inconvenience this may have caused.

Steven

This only works when the shareholders of Opco receive equal amounts of eligible and non eligible dividends. When you have the situation I described above where one shareholder receives eligible and another receives non-eligible dividends, the allocation of ERDTOH/NERDTOH doesn’t work without override.

@brian1 Using the workaround, I created a T2 return using your figures in the PDF. The workaround gives me \$38,333 on line 2E when I you enter \$191,667 in column I.1. Can you let me know if that still does not work for you so I can understand better. Thank you!

That works for now, yes.

Just to confirm I’m following, is Box I.1 going to be changed to represent the amount that goes into 2E, without any further calculation?

@brian1 Thanks for confirming that. Yes, you are correct.
Amount 2E should be equal to total of column I.1. The sole purpose of this column is to calculate amount 2E.

So, the fix I am adding will make amount 2E = total of column I.1. But, column I.1 will remain as a manual entry.

Steven

Okay perfect, that’s how I understood it.

Thank you!

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