Part IV Tax – Allocation of Losses
ITA 129
New subsections 129(4.1) and (4.2) of the Act are introduced consequential to the introduction of the eligible refundable dividend tax on hand (ERDTOH) and non-eligible refundable dividend tax on hand (NERDTOH) accounts. These new subsections provide an allocation rule for situations in which losses are claimed by a corporation to partly reduce its Part IV taxes otherwise payable and those Part IV taxes would otherwise be added to both ERDTOH and NERDTOH.
Based on the conditions set out in subsection 129(4.1), subsection 129(4.2) will apply in respect of a taxation year of a corporation if the corporation
- has an amount of tax payable for the year under Part IV;
- has claimed amounts under paragraph 186(1)(c) or (d) in respect of the year; and
- would, in the absence of paragraphs 186(1)(c) and (d), have an amount determined, at the end of the year, under both paragraph (a) of the ERDTOH definition and paragraph (b) of the NERDTOH definition in subsection 129(4).
When it applies, subsection 129(4.2) allocates a corporation’s non-capital loss and farm loss claims in respect of Part IV taxes otherwise payable first to the amount otherwise added to its NERDTOH account. The excess is allocated the corporation’s ERDTOH account.
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.
Source:
Budget 2018
Notice of Ways and Means Motion October 25, 2018
Explanatory Notes Relating to the Income Tax Act and to Other Legislation