Example
Your wholly-owned corporation owns common shares in Bell Canada (obviously, far less than 10% of the outstanding shares of Bell!). In 2015, it receives a $1,000 taxable dividend from Bell.
The dividend is included in income and then deducted in computing taxable income, so it has no net effect on your corporation’s income.
The Part IV tax is $333. However, if your corporation pays you a dividend of $1,000 in 2015, the $333 is refundable so that your corporation pays no net tax. If it waits until 2016 to pay the dividend, it will pay the tax in 2015 but will get the refund in 2016.
The Part IV tax does not apply to dividends received from a connected corporation, except to the extent the connected corporation gets a refund of tax for dividends received by it. If it does get such a refund, then your corporation is generally subject to the Part IV if it receives dividends from the connected corporation.
Example
Your corporation owns 100% of the shares of a connected corporation and both have calendar year ends. In 2015, the connected corporation pays a $1,000 dividend to your corporation. The connected corporation claims a dividend refund of $333 (it received a $1,000 dividend from a public corporation, which it then paid out to your corporation). Your corporation will be subject to $333 Part IV tax, which is refundable if it pays out a dividend to you, as discussed above.
If your corporation owned less than 100% of the shares of the connected corporation, its Part IV tax would be pro-rated based on the amount of dividends it received relative to other shareholders in the connected corporation. For example, if your corporation received a $600 dividend and other shareholders received $400, your corporation would be subject to a refundable tax of $200 (60% of the $333 refund of the connected corporation).
The Part IV tax can also be offset by ⅓ of your corporation’s non-capital losses, including those carried over from other taxation years. A non-capital loss is basically the corporation’s losses from business or property in excess of income from business or property for a taxation year (with possible adjustments).
