Reduction of RDTOH When Dividend Refund Is Denied

Subsection 129(1) provides that if a private corporation files its tax return within three years after the end of the taxation year, the minister will refund the lesser of one-third of the taxable dividends paid by the corporation and the corporation’s RDTOH. This dividend refund will be denied (that is, not credited to the taxpayer) if the tax return is not filed within this time limit; but, according to a CRA technical interpretation, the amount denied should still reduce the corporation’s RDTOH account (2012-0436181E5, October 18, 2012). This CRA position has been called into doubt by two recent cases: Presidential MSH Corporation v. The Queen (2015 TCC 61) and Nanica Holdings Limited v. The Queen (2015 TCC 85).

These two cases confirm the holding in Tawa Developments Inc. v. The Queen (2011 TCC 440), which the CRA declined to follow in its technical interpretation; it is not clear whether the CRA will change its position now that the body of case law on this issue has grown. Alternatively, as suggested by Graham J in Presidential, it would help if “Parliament will see fit to fix that drafting rather than leaving taxpayers to guess at the meaning of those subsections.” This way, taxpayers would not have to go through the court system each time to have a dispute resolved.

In Presidential, Graham J relied on the decisions in Tawa Developments and determined that “dividend refund” in subsection 129(1) refers to the refund actually received by the dividend payer. In addition, he pointed out that the goal of punishing delinquent taxpayers is already achieved because the taxable dividends paid by the corporation in the year permanently lose the ability to generate a dividend refund; reducing the RDTOH would sacrifice the goal of integration in favour of a greater level of punishment.

In Nanica, Miller J cited Presidential with approval, and provided further supportive reasoning:
  • It is the act of refunding that gives meaning to the phrase “in this Act referred to as its ‘dividend refund’ for the year.” Thus, if the minister does not refund an amount, then the dividend refund is nil.

  • Subsection 129(2) supports the position that “dividend refund” in subsection 129(1) refers to an amount actually refunded, because subsection 129(2) would come into play only when a corporation is entitled to receive a refund of an amount. If a corporation’s dividend refund is nil due to late filing, the minister will not apply any amount to the corporation’s liability under subsection 129(2). Similar reasoning was also set out in Presidential. This reasoning directly contradicts the rationale provided by the CRA in the TI.

  • Miller J rejected the minister’s position that because the RDTOH is a notional account, the components used to calculate it are also notional. “Dividend refund” must refer to the actual repayment of tax for integration to operate properly.

  • Miller J rejected the minister’s submission that the limitation period is rendered ineffective and meaningless if the denial of the dividend refund is not coupled with a reduction of the RDTOH in subsequent years. The loss of the dividend refund in the current year already results in double taxation when the payer corporation does not receive a dividend refund.

Jin Wen
Grant Thornton LLP, Markham
[email protected]

Canadian Tax Focus
Volume 5, Number 3, August 2015
©2015, Canadian Tax Foundation


  • Jin Wen 10/30/2015 8:09:54 AM

    An Update - After the publishing of this article, at the APFF Conference in October 2015, CRA has confirmed that they will accept the decisions in Presidential/Nanica in regards to the computation of RDTOH.

    Jin Wen, CPA, CA
    Grant Thornton LLP