Assessable dividends are dividends to which Part IV tax applies. They are amounts that are paid as dividends or are meant to represent the payment of dividends, where those dividends are eligible for deduction under either section 112, 113(1)(a), 113(1)(b), 113(1)(d), or 113(2) of Canada’s Income Tax Act. In short, they are dividends that, if received by a corporation, would be tax-free.
Dividends deductible under section 112 are taxable dividends received by a corporation from another taxable Canadian corporation, or a Canadian resident corporation that is controlled by the recipient corporation.
Dividends deductible under section 113 are certain dividends received from a foreign affiliate of a Canadian corporation.
Legislative and Legal Framework
Assessable dividends are governed primarily by section 186 of the Income Tax Act. The tax is designed to prevent the deferral of corporate tax through intercorporate dividend payments within closely held structures.
Part IV tax is generally refundable when the recipient corporation pays taxable dividends to its own shareholders. However, the classification of a dividend as “assessable” triggers the application of this tax when the payer corporation receives a dividend refund as a result of the payment.
The rules aim to align the timing of tax payments with economic benefit and limit tax planning strategies that attempt to shift or shelter corporate earnings without triggering equivalent tax at the shareholder level.
To apply Part IV tax properly, the taxpayer must consider whether the payer corporation is entitled to a dividend refund, the status of the recipient corporation, and whether the dividend falls within the definition of a “taxable dividend” under the Act. In practice, this requires careful examination of corporate structures, dividend history, and tax attributes such as the Refundable Dividend Tax on Hand (RDTOH) balance.
Interpretation of these provisions is further shaped by case law and CRA administrative positions, which clarify the scope and intent of anti-avoidance measures embedded in the Part IV regime.
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