Proposed Dividend Refund Changes: What Business Owners Need to Know
The federal government is proposing changes to certain corporate dividend tax refunds. These changes could affect business owners who operate through more than one corporation, particularly those with a holding company.
Although the changes have not yet become law, they could affect corporate tax returns that have already been filed.
What is a dividend tax refund?
When a private corporation earns investment income, such as interest or income from investments, it may pay additional corporate taxes.
Some of those taxes can be refunded when the corporation pays dividends to its shareholders.
For example, if a corporation has accumulated $20,000 in refundable taxes, it may be entitled to receive that money back from the Canada Revenue Agency (CRA) when it pays sufficient dividends.
What is the government proposing to change?
Consider a business owner who operates through two corporations:
An operating company that runs the business.
A holding company that owns the operating company.
Under the current rules, the operating company may qualify for a dividend tax refund when it pays a dividend to its holding company.
If the two corporations have different fiscal year-ends, the operating company may receive its refund before the holding company has to account for the related tax.
The government wants to eliminate this timing advantage.
Under the proposed rules, certain dividend refunds could be delayed until additional conditions are met, generally when dividends are paid outside the corporate group.
The refund is not necessarily lost, but the corporation may have to wait longer to receive it.
What if your corporation has already filed its tax return?
This is where the proposed changes become particularly important.
The government intends the changes to apply to taxation years beginning on or after November 4, 2025, even though the legislation has not yet received Royal Assent.
Some corporations may therefore have already filed their tax returns and claimed dividend refunds under the existing rules.
If the legislation passes with retroactive application, those refunds could be adjusted or reassessed, potentially resulting in amounts owing to CRA.
What does CRA expect businesses to do?
For now, the existing legislation remains in effect.
CRA has not yet provided comprehensive guidance specifically addressing previously filed returns affected by these proposed changes.
Businesses should retain their dividend records and supporting calculations. There is no need to assume that previously filed returns must automatically be amended simply because the changes have been proposed.
Could your business be affected?
Not every corporation receiving a dividend refund will be affected.
The proposed changes are particularly relevant to businesses with operating and holding companies that have different fiscal year-ends.
If your corporation has paid dividends to another corporation or claimed a dividend tax refund, it may be worthwhile to review those transactions.
At Deacur Worthington & Associates Ltd., we are monitoring these developments and their potential impact on corporate tax filings and planning.
If you have questions about whether these proposed changes could affect your business, please contact our office.
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