How Corporations are Taxed on Dividends Received

In this blog, I will explain how corporations are taxed on dividends received.

The first concept you need to understand is the difference between connected and non-connected corporations. Canadian corporations receive dividend income from both connected and non-connected Canadian corporations. A corporation is connected if it owns at least 10% of the voting stock of the other corporation. For example, where you have a holding corporation owning 100% of the voting shares of a subsidiary corporation, then the two corporations are connected. Where a Canadian corporation receives a dividend from a non-connected Canadian corporation, a special tax of 33% is imposed on the amount of the dividend received. In other words, for every $1000 of dividends received by a Canadian corporation, from a non-connected Canadian corporation, $333 of this special part four tax becomes payable.

The second concept you need to understand is the regular corporate income tax. Regular corporate income tax does not apply to dividends received by a corporation from another Canadian corporation. In other words, Canadian inter-corporate dividends are not subject to regular corporate tax regardless of whether or not the corporations are connected or non-connected.

The third concept is foreign corporate dividends. The corporate taxation of a dividend received from a foreign corporation depends on whether that foreign corporation is earning income from an active business outside of Canada in a treaty country. For example, assume you have a Canadian corporation that owns 100% of the shares of a subsidiary corporation in the US. Further, assume that the US Corporation carries on an active business in the US. Here is the result, since Canada has a tax treaty with the US and because the dividends were received from a corporation carrying on an active business in a treaty country, the dividends received by the Canadian corporation are not taxable to it

Here is the tip: Whenever you are dealing with corporate dividends, consult an accountant because the tax rules are very complex.

If you are planning on preparing your own return this year, please have a look at our 2014 personal tax return checklist for some guidance.  Also, make sure to have a look at this article on what 2014 personal tax credits you can claim.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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