Holdco owns all of Opco’s issued shares. Both corporations have calendar year-ends. Opco doesn’t have any safe income, but it has $383,333 of RDTOH. Opco pays a $1 million dividend to Holdco, which pays a $1 million dividend to its only shareholder, who is an individual. Holdco is subject to Part IV tax on the dividend from Opco, but Holdco is also entitled to a refund of the tax when it pays the $1 million dividend.
Assume that 55(2.1)(b) applies to the dividend Holdco received and that the refund of the Part IV tax in Holdco is also a part of the series. In that case, the dividend paid to Holdco will be re-characterized as a capital gain so that Part IV tax is not payable and Holdco, instead, will be entitled to add $153,333 to RDTOH and $500,000 to its CDA in respect of the gain.
How does one report the foregoing mess? The CRA says that Holdco must file two returns, one to report the Part IV tax and its refund and then an amended return to report the application of 55(2) to the dividend received from Opco.
Can Holdco late-file a CDA election in respect of the $500,000 added to its CDA in the amended return? The CRA claims that it can’t because the election would retroactively (and therefore improperly?) take advantage of the application of the anti-avoidance rule. The CDA balance will be available but only in respect of subsequent dividends. 2016 CTF Roundtable Q4.
Editorial comment: This sounds like more hocus pocus to me, or like more evidence that our system for taxing inter-corporate dividends is broken.
