Connected corporation (Part IV tax)

A holding-company owner whose operating company pays dividends up to the holdco meets this test. The CRA’s T2 guide says taxable dividends from a non-connected corporation are subject to Part IV tax, while those from a connected corporation are subject to it only when paying the dividends generates a dividend refund for the payer corporation.

How the test is built

Subsection 186(4) works at any time in a taxation year of the recipient and has two routes. Under paragraph (a), the payer is controlled by the recipient, otherwise than by virtue of a right referred to in paragraph 251(5)(b); for this Part, subsection 186(2) widens control to count shares held by persons the recipient does not deal with at arm’s length. Under paragraph (b), the recipient owned more than a stated share of the payer’s voting share capital and shares worth more than a stated share of the value of all its issued shares; both must be met, and the figures are in the subsection.

What to ask

• Whether the recipient controls the payer, or meets both ownership tests
• What the share structure was in the year of the dividend
• Whether the dividend generated a dividend refund for the payer

This entry covers the connection test only; the tax itself is at Part IV tax. For dividends before a sale, see paying a dividend before you sell your shares.