Part IV tax
Part IV tax is a refundable tax under the Income Tax Act on certain taxable dividends received by a private corporation or a subject corporation. Section 186 sets the amount, and it differs depending on whether the corporation that paid the dividend is connected with the recipient.
You meet Part IV tax when a holding company receives dividends from another company, including a dividend taken out before a sale. Subsection 186(1) imposes it on a corporation that is at any time in the year a private corporation or a subject corporation. The CRA’s folio on taxable dividends places it within the refundable tax system under Part I and Part IV, and the tax paid adds to the balances from which a dividend refund can come.
Connected and non-connected payers
Paragraph 186(1)(a) taxes assessable dividends received from corporations other than payer corporations connected with the recipient. Paragraph 186(1)(b) works differently for dividends from a connected payer: it is a proportion of the payer’s dividend refund. The CRA’s T2 guide says the tax paid generates both eligible and non-eligible RDTOH, and that Schedule 3 is used to calculate it. Subsection 186(1) also lets the corporation reduce the amount by claiming certain non-capital and farm losses, and subsection 186(1.1) reduces it where Part IV.1 tax was payable on the dividend.
What to ask
- Which dividends received are from connected corporations
- Whether the payer claimed a dividend refund on them
- How Part IV tax interacts with section 55(2) for a planned dividend
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
- 02Canada Revenue AgencyGovernmentT2 Corporation – Income Tax Guide – Chapter 6: Pages 6 and 7 of the T2 return
- 03Canada Revenue AgencyGovernmentIncome Tax Folio S3-F2-C2, Taxable Dividends from Corporations Resident in Canada
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