Entrepreneurship & Small Business

Connected company Tax

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  • May 30th, 2021 12:44 am
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Newbie
Jun 14, 2020
61 posts
18 upvotes
Toronto

Connected company Tax

We have a parent corproation that generate revenue and is held by 3 other corporations at roughly 33% each.
This parent corporation generates revenue and pays the Small Business Tax rate. If we decide to move the retained earning into the 3 other corporations, would there be any taxes applicable here given the connected company nature?

Many thanks to all!
8 replies
Sr. Member
Jan 18, 2017
607 posts
527 upvotes
AB
Depends on how you want to do this. Usually it's done either via management fees, or dividends.

Management fees would be a straight flow-through (expensed on OpCo' side/income on HoldCo's side). This will functionally be the equivalent of having no tax for OpCp/Full tax for HoldCo's

If you go the dividend route, it'll be a Part IV tax flow-through, assuming that you also pay out dividends to the SH's of the HoldCos. If you don't do any dividends to HoldCo SH's, then you'd be looking at 33.3% tax on the interco dividends, until you do pay out a dividend.

Also, you could try intercompany loans, which attract zero tax. Just make sure you structure the loan agreements properly.
______
MR CROSSBORDER KNOW IT NOTHING, but ready to spew forth. (Also a CPA)
Newbie
Jun 14, 2020
61 posts
18 upvotes
Toronto
Thanks very much for your reply! The HoldCo you're referring to the 3 other corporations right? Not the parent company which generates revenue?
crossborderguy wrote: Depends on how you want to do this. Usually it's done either via management fees, or dividends.

Management fees would be a straight flow-through (expensed on OpCo' side/income on HoldCo's side). This will functionally be the equivalent of having no tax for OpCp/Full tax for HoldCo's

If you go the dividend route, it'll be a Part IV tax flow-through, assuming that you also pay out dividends to the SH's of the HoldCos. If you don't do any dividends to HoldCo SH's, then you'd be looking at 33.3% tax on the interco dividends, until you do pay out a dividend.

Also, you could try intercompany loans, which attract zero tax. Just make sure you structure the loan agreements properly.
Newbie
Jun 7, 2016
91 posts
64 upvotes
thealpevin wrote: We have a parent corproation that generate revenue and is held by 3 other corporations at roughly 33% each.
This parent corporation generates revenue and pays the Small Business Tax rate. If we decide to move the retained earning into the 3 other corporations, would there be any taxes applicable here given the connected company nature?

Many thanks to all!

As the above user posted tax treatment will depend on the form in which the funds are moved from the operating company (OPCO) to the holding companies (Holdcos).

Please be advised that management fees may not be the best method, the holding companies will need to show that this is business income in order to utilise the small business deduction, furthermore the management fees paid by Opco to the Holdcos must be reasonable for the management services that are performed, if any.

You’re looking at dividends in this case:

Inter company dividends between two Canadian corporations is not subject to Part I tax, since these dividends are deductible from the recipients taxable income pursuant to section 112 of the Income Tax Act.

Since each Holdco owns more than 10% of the shares of Opco (assuming that there is only 1 class of shares in circulation), they are all connected with Opco pursuant to section 186 of the Act. Therefore Part IV tax will apply only to the extent that Opco has a balance of RDTOH (refundable dividend tax on hand).
Opco will only have an rdtoh balance if it earned passive income, realized capital gains, received other dividends from connected corps etc....if your business only earns business income, you will likely have 0 RDTOH, therefore there will be no Part IV tax.

To verify this: open the latest t2 of Opco, look at the. Jacket of the T2: look for the term: “Refundable Dividend Tax on Hand” - balance at the end of the tax year.

Part IV tax is a refunadable tax (a temporary tax) that is refunded via the payment of dividends.

If there is an RDTOH balance: each holdco will pay part IV tax calculated according to this formula:
( $ dividend received by holdco / total dividend paid by Opco) X Opco’s dividend refund.

Holdco can recuperate it’s part IV tax by paying out dividends to its shareholder(s).

Feel free to ask any questions.

FYI: I’m a tax accountant.
Newbie
Jun 14, 2020
61 posts
18 upvotes
Toronto
Many thanks for the detailed explaination! Are you taking clients for T2 preparations as well?
PeterG91 wrote: As the above user posted tax treatment will depend on the form in which the funds are moved from the operating company (OPCO) to the holding companies (Holdcos).

Please be advised that management fees may not be the best method, the holding companies will need to show that this is business income in order to utilise the small business deduction, furthermore the management fees paid by Opco to the Holdcos must be reasonable for the management services that are performed, if any.

You’re looking at dividends in this case:

Inter company dividends between two Canadian corporations is not subject to Part I tax, since these dividends are deductible from the recipients taxable income pursuant to section 112 of the Income Tax Act.

Since each Holdco owns more than 10% of the shares of Opco (assuming that there is only 1 class of shares in circulation), they are all connected with Opco pursuant to section 186 of the Act. Therefore Part IV tax will apply only to the extent that Opco has a balance of RDTOH (refundable dividend tax on hand).
Opco will only have an rdtoh balance if it earned passive income, realized capital gains, received other dividends from connected corps etc....if your business only earns business income, you will likely have 0 RDTOH, therefore there will be no Part IV tax.

To verify this: open the latest t2 of Opco, look at the. Jacket of the T2: look for the term: “Refundable Dividend Tax on Hand” - balance at the end of the tax year.

Part IV tax is a refunadable tax (a temporary tax) that is refunded via the payment of dividends.

If there is an RDTOH balance: each holdco will pay part IV tax calculated according to this formula:
( $ dividend received by holdco / total dividend paid by Opco) X Opco’s dividend refund.

Holdco can recuperate it’s part IV tax by paying out dividends to its shareholder(s).

Feel free to ask any questions.

FYI: I’m a tax accountant.
Newbie
Oct 7, 2016
18 posts
5 upvotes
Ancaster
Hi Peter , Thanks for the detailed explanation , I also Wanted to know if you're taking clients . Please feel free to PM Me .
Newbie
Jun 14, 2020
61 posts
18 upvotes
Toronto
Hi Peter, quick question - does the OPCO need to issue T5 to the HOLDCO by March 1st (deadline)? I assume yes.
thanks very much!
Sr. Member
Jan 18, 2017
607 posts
527 upvotes
AB
Yes the filing deadline this year is Mar 1st.
thealpevin wrote: Hi Peter, quick question - does the OPCO need to issue T5 to the HOLDCO by March 1st (deadline)? I assume yes.
thanks very much!
______
MR CROSSBORDER KNOW IT NOTHING, but ready to spew forth. (Also a CPA)
Newbie
Jun 14, 2020
61 posts
18 upvotes
Toronto
In Holdco's T2 filing, how do I report the income earned by Opco and paid to the Holdco?
Should I enter the amount in Non-Farming Revenue section as "Dividends from Canadian sources"? Also where should i report this interconnected dividend credit in holdco's T2?
BTW, can the holdco also be earning an active business income?

many thanks!!!
PeterG91 wrote: As the above user posted tax treatment will depend on the form in which the funds are moved from the operating company (OPCO) to the holding companies (Holdcos).

Please be advised that management fees may not be the best method, the holding companies will need to show that this is business income in order to utilise the small business deduction, furthermore the management fees paid by Opco to the Holdcos must be reasonable for the management services that are performed, if any.

You’re looking at dividends in this case:

Inter company dividends between two Canadian corporations is not subject to Part I tax, since these dividends are deductible from the recipients taxable income pursuant to section 112 of the Income Tax Act.

Since each Holdco owns more than 10% of the shares of Opco (assuming that there is only 1 class of shares in circulation), they are all connected with Opco pursuant to section 186 of the Act. Therefore Part IV tax will apply only to the extent that Opco has a balance of RDTOH (refundable dividend tax on hand).
Opco will only have an rdtoh balance if it earned passive income, realized capital gains, received other dividends from connected corps etc....if your business only earns business income, you will likely have 0 RDTOH, therefore there will be no Part IV tax.

To verify this: open the latest t2 of Opco, look at the. Jacket of the T2: look for the term: “Refundable Dividend Tax on Hand” - balance at the end of the tax year.

Part IV tax is a refunadable tax (a temporary tax) that is refunded via the payment of dividends.

If there is an RDTOH balance: each holdco will pay part IV tax calculated according to this formula:
( $ dividend received by holdco / total dividend paid by Opco) X Opco’s dividend refund.

Holdco can recuperate it’s part IV tax by paying out dividends to its shareholder(s).

Feel free to ask any questions.

FYI: I’m a tax accountant.

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