Part IV tax: 38 1/3% on portfolio dividends, refund share if connected

How much Part IV tax applies depends on who paid the dividend

Section 186(1) charges Part IV tax to a corporation that is a private corporation or a subject corporation at any time in the year, on assessable dividends it receives: taxable dividends it deducts under s.112, or under s.113 for certain foreign affiliate dividends laws-lois.justice.gc.ca. The s.112 deduction keeps the dividend out of Part I tax laws-lois.justice.gc.ca. Part IV replaces it with a refundable tax so a holding company can't park investment dividends at a low rate.

The pool rules come from the RDTOH definitions in s.129(4). Eligible RDTOH picks up Part IV tax on eligible dividends from non connected payers and on connected dividends to the extent they released the payer's eligible RDTOH. Everything else goes to non eligible RDTOH laws-lois.justice.gc.ca. The refund side, at 38 1/3% of dividends paid, is covered in RDTOH explained.

Public corporations (other than subject corporations) don't calculate Part IV tax. Section 186.1 also exempts a corporation that was bankrupt at any time in the year, and banks, insurers, licensed trust companies and certain registered securities dealers that held that status throughout the year canada.ca.

When is a payer corporation connected?

Under s.186(4), the payer is connected with your client's corporation at a time in the year if your client's corporation controls it, or owns more than 10% of its full voting shares and shares worth more than 10% of the fair market value of all its issued shares laws-lois.justice.gc.ca. Both 10% tests have to be met. Owning 30% of the value through nonvoting preferred shares alone doesn't make the payer connected.

The trap is the control test. For Part IV, s.186(2) treats the payer as controlled by the recipient if more than 50% of its full voting shares belong to the recipient, to persons the recipient doesn't deal with at arm's length, or to both together laws-lois.justice.gc.ca. The CRA repeats this in the T4012 canada.ca.

So take a shareholder who owns all of Holdco and 95% of the voting shares of Opco directly, with Holdco holding the other 5%. Holdco and its controlling shareholder don't deal at arm's length, and together they hold 100% of Opco's votes. Opco is controlled by Holdco for Part IV and the two are connected, even though Holdco's own stake is far below 10%. Dividends from Opco to Holdco then carry Part IV tax only to the extent Opco gets a dividend refund.

Worked example: Holdco owes $29,133.33 on a connected and a portfolio dividend

Holdco owns all of Opco. In the year, Opco earns $100,000 of interest, which puts $30,666.67 into its non eligible RDTOH (30 2/3%, the same figure as the RDTOH page). Opco pays a $200,000 non eligible dividend to Holdco and $50,000 directly to the shareholder, so its taxable dividends paid total $250,000. Holdco also receives $12,000 of eligible dividends on public company shares.

The Opco figure follows the proportion in s.186(1)(b): the dividend Holdco received over all taxable dividends Opco paid in its year while it was private laws-lois.justice.gc.ca. Holdco pays $24,533.33 on a $200,000 dividend, about 12.3%, because Opco's refund was capped by its pool under s.129(1) laws-lois.justice.gc.ca. At the 38 1/3% portfolio rate the same dividend would have cost $76,666.67.

Holdco recovers the $29,133.33 when it pays taxable dividends of its own. An eligible dividend of $12,000 releases the $4,600 of eligible RDTOH (38 1/3% × $12,000), and a non eligible dividend of $64,000 releases the $24,533.33 (38 1/3% × $64,000), provided the T2 is filed within three years after the year end laws-lois.justice.gc.ca. Paying the eligible dividend also needs GRIP; see GRIP account.

Using losses against Part IV tax costs your client the loss

The amount from s.186(1)(a) and (b) is reduced by 38 1/3% of the noncapital and farm losses the corporation claims for the year, or carries in from the 20 preceding or 3 following years within the s.111 limits laws-lois.justice.gc.ca. In the example, claiming $3,000 of noncapital losses would cut Holdco's Part IV tax by $1,150 (38 1/3% × $3,000) to $27,983.33.

The loss is gone once you do. Section 111(3)(a) reduces the loss available against taxable income by the amounts claimed under s.186(1)(c) and (d) laws-lois.justice.gc.ca. Since Part IV tax comes back as a dividend refund anyway, burning a loss that could shelter future Part I tax is usually a poor trade unless the corporation has no plan to pay taxable dividends.

Where Part IV.1 tax applies to the same dividend (taxable preferred shares), Part IV tax drops by 10% of the dividend for a non connected payer, or by 30% of the Part IV amount for a connected payer, under s.186(1.1) laws-lois.justice.gc.ca.

When is Part IV tax due and where does it go on the T2?

Part IV tax is payable on or before the corporation's balance due day laws-lois.justice.gc.ca. Under s.248(1) that's three months after year end for a corporation that was a CCPC throughout the year, claimed the small business deduction for the year or the prior year and stayed within the taxable income test; otherwise it's two months laws-lois.justice.gc.ca. A holding company with only investment income usually claims no small business deduction, so plan on two months.

Parts 1 and 2 of Schedule 3 compute the tax, with a separate calculation for each payer and a separate line for each payer tax year when year ends differ. The total goes on line 712 of the T2 canada.ca. Dividends from a capital dividend account aren't taxable; if they were included in income, back them out on Schedule 1 canada.ca. For the tax free side, see capital dividend account.

Budget 2025 would suspend refunds in tiered structures with staggered year ends

Mismatched year ends let a group defer Part IV tax: the payer claims its refund now while the recipient's Part IV tax falls into a later year. Budget 2025 proposed to suspend the payer's dividend refund on a dividend paid to an affiliated corporation in that situation, released when the recipient pays a taxable dividend to a non affiliated corporation or an individual, for taxation years that begin on or after November 4, 2025 budget.canada.ca.

As of October 2026 the measure isn't law. It's in Bill C-31, the second Budget 2025 implementation act, which LEGISinfo shows at committee stage in the House of Commons parl.ca. Its wording has changed since the budget, so check the bill text before you rely on the rule for a client's year end. Part IV tax also doesn't settle whether s.55(2) turns a large intercorporate dividend into a capital gain; see section 55(2) safe income.