part iv tax circularity

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Anonymous Posted 4 days ago MadanCA Team edited answer 1 day ago

I need your advice and, if necessary, assistance to correct/confirm tax treatment for a pre-sale reorganization that preceded the sale of Opco (closed end of aug 2025). Below is the full factual background, what we did, what has posted on the T2s, and the specific questions I need you to answer:
Facts & timeline
Opco: business sold by shareholder in aug 2025.
Holdco: connected corporation owned by the same shareholder.
Sale of Opco shares: closed Aug 2025 (buyer purchased Opco without the real estate, the operating clinic).
Real estate (had been owned by Opco): FMV ≈ $1,100,000.
Safe income on hand in Opco prior to transfer: $955,000.
What we did pre-closing:
Opco declared a dividend equal to safe income ($955,000) to Holdco and the dividend was satisfied by issuance of an intercompany promissory note (i.e., payable by Holdco to Opco by note — no cash payment).
The remaining value ($1,100,000 − $955,000 = $145,000) of the property was dealt with the purchase price adjustment so the property left Opco and ended up in Holdco before the share sale.
Result: no real estate, the operating clinic building in opco and then sold in aug 2025.
What is showing on the filings
Opco T2: shows a dividend refund (RDTOH refund) related to the dividend paid out of safe income and real estate disposition and gain was approx $800k and issued cda of $400k
Holdco T2: shows Part IV tax payable arising from the dividend receipt.
My concerns / observations
The dividend was paid by note (no cash), and we documented board resolutions and the promissory note. The intent was to avoid Part IV circularity .
Despite the intercompany-note structure, the mechanics have produced an Opco dividend refund and a Holdco Part IV tax on the T2s.
I want to ensure there is no adverse CRA position or an unintended tax cost. If Part IV tax has been recorded on Holdco’s T2 in error (or because of timing), I want to know whether we can:
Remove or override div refund on the T2 (amend/adjust) and on what basis; or
Obtain a refund and pay part iv tax in holdco which cra may look as part iv tax circularity.
what is the correct remedy and supporting documentation CRA will expect. thank you

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score 0 · Answer 1 · 2025-10-31T15:46:57+00:00

Hi Konica,

Thank you for outlining your situation so clearly — this is a sophisticated pre-sale reorganization, and your concern about Part IV tax circularity is well-founded.

1. Background Recap

Opco sold its operating business in August 2025, after removing the real estate from the company.
Holdco, a connected corporation under the same shareholder, received a $955,000 dividend from Opco, representing safe income on hand, settled by way of an intercompany promissory note (not cash).
The remaining $145,000 of FMV for the real estate was handled through a purchase price adjustment.
On the filings:
- Opco’s T2 shows an RDTOH refund and a CDA credit.
- Holdco’s T2 shows Part IV tax payable on the intercorporate dividend.

2. Why Part IV Circularity Arises

Even when a dividend is satisfied by a promissory note rather than cash, CRA generally treats the dividend as “paid and received” for both the dividend refund (Opco) and Part IV tax (Holdco) purposes under subsection 186(1)(b) of the Income Tax Act.

This can create a circular result — Opco receives a dividend refund from its RDTOH account while Holdco simultaneously pays Part IV tax on the same dividend, even though the overall economic position is neutral.

CRA acknowledged this in Technical Interpretation 2010-0374921I7, which confirmed that Part IV tax and the dividend refund can arise concurrently even when the dividend is satisfied by a note rather than cash, provided the note constitutes a legally enforceable payment of the dividend.

In other words, the “circularity” is not necessarily an error — it’s a timing and mechanical outcome of how the Act works.

3. CRA’s View (TI 2010-0374921I7)

CRA’s comments in the interpretation can be summarized as follows:

“The issuance of a promissory note by a corporation to its shareholder constitutes payment of a dividend where the note is unconditional, legally enforceable, and payable on demand or within a reasonable time. The fact that the dividend is not satisfied in cash does not preclude the application of Part IV tax or the dividend refund mechanism.”

Thus, both the dividend refund to Opco and the Part IV tax to Holdco can validly arise in the same taxation year, even though this produces a cash-neutral (and circular) result.

4. Practical Options

If you believe the T2 filings overstated the dividend refund or triggered it prematurely (e.g., if the note was post-year-end or conditional), there are two corrective paths:

Option A– Amend Opco’s T2: Defer the dividend refund until the note becomes legally payable. CRA will expect documentation such as:
- Board minutes declaring the dividend and authorizing the note,
- A copy of the promissory note showing enforceability and date,
- A reconciliation of the RDTOH and CDA balances before and after adjustment.
Option B – Accept the Circularity: Retain the current filings, pay the Part IV tax in Holdco, and recover it in a subsequent year when Holdco pays a taxable dividend to its shareholder. CRA accepts this as a legitimate, if redundant, outcome.

5. Recommendation
Given that both filings appear consistent and the note was properly documented, the simplest path may be to leave the filings as-is. The Part IV tax will effectively be recovered when Holdco pays out taxable dividends.

If, however, your year-end timing or documentation suggests the note was not enforceable until after year-end, an amendment to Opco’s return could be justified to defer the refund.

part iv tax circularity

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