What is IV tax?

Refundable Part IV Tax applies to certain dividends received by private corporations in Canada. Its main purpose is to prevent corporations from deferring taxes by passing dividends between companies and to address potential double taxation issues that can arise when one corporation pays dividends to another. It also connects to the broader tax concept of integration, which seeks to balance taxes paid at both the corporate and shareholder levels.

How Part IV Tax is Calculated:

1. Dividends from Non-Connected Corporations ("Portfolio Dividends"):

These are dividends from corporations in which the recipient owns less than 10% of the voting shares. The Part IV tax rate is 38 1/3% of the total dividends received.

2. Dividends from Connected Corporations:

These are dividends from corporations in which the recipient owns 10% or more of the voting shares. The Part IV tax is calculated as the recipient corporation's ownership percentage multiplied by the dividend refund received by the payor corporation.

Example:

Pine Ltd., a Canadian-controlled private corporation, received the following dividends in the year ending December 31, 2020:

Portfolio dividends (various investments): $25,000

Dividends from Maple Inc.: $60,000

Dividends from Oak Inc.: $40,000

Pine Ltd. owns:

100% of the voting shares of Maple Inc.

40% of the voting shares of Oak Inc. (this ownership percentage reflects the fair value of its investment).

Additional Details:

Oak Inc. received a dividend refund of $20,000 as a result of paying a $100,000 dividend.

Maple Inc. did not receive any dividend refund for its dividend payment.

Calculation of Part IV Tax Payable:

1. Tax on Portfolio Dividends:

38 1/3% of $25,000 = $9,583

2. Tax on Dividends from Maple Inc.:

Since Maple Inc. received no dividend refund, the Part IV tax on these dividends is $0.

3. Tax on Dividends from Oak Inc.:

Pine Ltd. owns 40% of Oak Inc., and Oak Inc. received a $20,000 dividend refund. Therefore, the Part IV tax is calculated as 40% of $20,000 = $8,000.

Total Part IV Tax Payable:

$9,583 (on portfolio dividends) + $8,000 (on Oak Inc. dividends) = $17,583

For more information, please visit the Canada Revenue Agency: Canada Revenue Agency