Finance Canada Releases Draft Rules For Allocating Losses Between the Eligible and Non-Eligible RDTOH Accounts

If a corporation opts to claim non-capital losses against Part IV tax using paragraphs 186(1)(c) or (d),  proposed subsections 129(4.1) and (4.2) prescribe an ordering rule what requires the loss be set off against the Non-Eligible RDTOH account before any of it can be used against the Eligible RDTOH account.

Finance Canada provides two simple examples, which I reproduce below.

Example 1:

A corporation receives a $100 eligible dividend and a $100 non-eligible dividend, both from non-connected corporations. In the absence of the utilization of any offsetting losses, the corporation would pay 38.33 per cent Part IV tax on each of these amounts, with $38.33 added to its ERDTOH account and $38.33 added to its NERDTOH account. However, if that same corporation also had a $150 non-capital loss that it chose to utilize, its Part IV taxes would be reduced by 38.33 per cent of the loss, or $57.50.

Subsection 129(4.2) will first allocate the losses claimed to reduce the amount allocated to the corporation’s NERDTOH. In this example, as the tax-effected amount of the losses claimed ($57.50) exceeds the amount that would otherwise be allocated to the corporation’s NERDTOH ($38.33), the NERDTOH addition is reduced to zero. The amount by which the losses claimed exceeds the amount that would otherwise be added to the corporation’s NERDTOH ($57.50 – $38.33 = $19.17) is allocated to ERDTOH, i.e. it reduces the amount that would otherwise be added to the corporation’s ERDTOH.

In summary, the $150 loss claim, or its tax-effected amount of $57.50, reduces the corporation’s Part IV tax otherwise payable from $76.66 to $19.16. Based on the formula in subsection 129(4.2), no portion of this residual Part IV tax payable of $19.16 is added to NERDTOH – the entire amount is added to ERDTOH.

Example 2:

A corporation receives a $100 eligible dividend and a $100 non-eligible dividend, both from non-connected corporations. In the absence of the utilization of any offsetting losses, the corporation would pay 38.33 per cent Part IV tax on each of these amounts, with $38.33 added to its ERDTOH account and $38.33 added to its NERDTOH account. However, if that same corporation also had a $50 non-capital loss that it chose to utilize, its Part IV taxes would be reduced by 38.33 per cent of the loss, or $19.17.

As in Example 1, subsection 129(4.2) will first allocate the losses claimed to reduce the amount allocated to the corporation’s NERDTOH. In this example, as the tax-effected amount of the losses claimed ($19.17) is less than the amount that would otherwise be allocated to the corporation’s NERDTOH ($38.33) the NERDTOH addition is reduced to $19.16 and there is no excess to allocate to ERDTOH.

In summary, the $50 loss claim, or its tax-effected amount of $19.17, reduces the corporation’s Part IV tax otherwise payable from $76.66 to $57.49. Based on the formula in subsection 129(4.2), the residual amount of Part IV tax payable of $57.49 is allocated to ERDTOH in the amount of $38.33 and to NERDTOH in the amount of $19.16.

Subsections 129(4.1) and (4.2) apply to taxation years that begin after 2018.

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