# Taxation of dividends in a holding corporation



## atrp2biz (Sep 22, 2010)

In short, how does this work? How does tax deferral work on (eligible, non-intercompany) dividends received by a corporation. Upon distributions to the shareholders of the holding company, there would obviously be taxation on the dividends, but what about the year the corporation receives dividends?

EDIT: Reading about Part IV taxes--this will take a while to absorb.


----------



## Charlie (May 20, 2011)

The concept is...there is no deferral on investment income. You pay...effectively...the top personal marginal rate. The refundable tax goes back to the co when the div is paid out personally - at which point the recipients are subject to their own marginal rates. 

So....if you flow it all out in the yr received you should be relatively indifferent to having received the dividend personally. Last time I saw the analysis, there was a slight (about 1%?) additional tax for having earned through a corp. Usually offset by higher capital if the holding corps retained earnings had flowed up through tax deferred active income. 

But effectively.....usually no double tax....and no deferral. Not sure if it holds true for all provinces regarding the 'eligible' dividends -- it does for BC -- but I recall not all provincial tax was fully integrated. 

Good luck in crunching the numbers.


----------



## FrugalTrader (Oct 13, 2008)

My understanding is that eligible dividends received by your corp can flow through to the shareholders tax free to the corporation. The shareholders would pay taxes on the eligible dividend and receive the dividend tax credit.

Can any other tax pros chime in?


----------



## sprocket1200 (Aug 21, 2009)

what we do in BC for our companies is this:

company A pays tax on income to create retained earnings. These retained earnings then flow to the parent holdco as intra corporate dividends and are a tax free transfer, as tax has already been paid. these funds can remain in holdco tax free (though interest or other earnings they create are taxed), until they are taken by the shareholders as a shareholder dividend. 

shareholder would then pay tax, get dividend tax credits, etc.

if there are shareholder loans, then these may be used to adjust taxable income from year to year to your benefit...

ensure that all shareholders have a separate class of shares, so that each can be given different amounts of dividends if your tax planning requires it.


----------



## Helianthus (Oct 19, 2010)

Unfortunately, there is no real tax deferral on dividends. When an eligible dividend is received by a corporation, Part IV tax will be incurred at 1/3 of the amount of the dividend. At the same time, Refundable Dividend Tax on Hand (RDTOH) increases by the same amount, and the General Rate Income Pool (GRIP) increases by the amount of the dividend. Once the corporation pays a dividend to a holding company or an individual, they will then receive up to 1/3 of the amount of the dividend as a dividend refund, depending on their RDTOH balance. Paying the dividend out at a personal level, you are looking at a maximum 28.19% marginal tax rate if designated as eligible (utilizing the increase in GRIP), or 32.57% if designated as non-eligible (sparing the GRIP balance for a later date).

On edit: My bad, the rates above are for ON. I now see you are in AB. Rates are 17.72% and 27.71% for eligible and non-eligible, respectively.


----------



## FrugalTrader (Oct 13, 2008)

Does anyone know the actual process of extracting the eligible dividends out of a holding corp?

If the holdco makes $10k in eligible dividends within its fiscal year, does the holdco simply write a cheque to the shareholder(s) for the total amount of dividends prior to year end, and the accountant handles the PartIV tax, RTDOH, GRIP etc?


----------



## Homerhomer (Oct 18, 2010)

FrugalTrader said:


> Does anyone know the actual process of extracting the eligible dividends out of a holding corp?
> 
> If the holdco makes $10k in eligible dividends within its fiscal year, does the holdco simply write a cheque to the shareholder(s) for the total amount of dividends prior to year end, and the accountant handles the PartIV tax, RTDOH, GRIP etc?


Pretty much, but you don't really need to write a cheque, you just have to declare the dividends.


----------

