Could your corporation be affected by the new dividend suspension rules?

Private corporations in Canada may no longer be able to temporarily defer income tax on certain investment income, under proposed dividend suspension rules. These rules, introduced in Federal Budget 2025, aim to restrict a corporation’s ability to recover refundable dividend tax on hand (RDTOH) until dividends have been paid to individual shareholders or otherwise out of the corporate group.

Private corporations in Canada currently pay a high tax rate on investment income similar to the personal marginal rate. However, when that investment income is later paid out as taxable dividends, the corporation can recover a portion of this tax as RDTOH. In tiered corporate structures, dividends paid within the group can create timing mismatches that result in a temporary tax deferral. To address this, the federal government has proposed a new set of dividend suspension rules that restricts a corporation’s ability to recover RDTOH if insufficient dividends are paid out of the affiliated group on or after the original dividend payer’s corporate tax balance-due date. 

If enacted, these rules will be effective for tax years beginning on or after November 4, 2025. Given the broad scope of the proposed rules, careful planning may be required to avoid unintended deferral or loss of RDTOH.

What are the proposed changes?

The proposed dividend suspension rules state that a payer corporation will not receive an RDTOH refund on a "suspended dividend". 

A dividend is considered a "suspended dividend" (i.e., not a taxable dividend) if both the following conditions are met:

• The dividend is paid to an affiliated private corporation.
• The recipient corporation’s balance-due date falls after the payer‘s balance-due date.

A payer corporation may be able to "release" a suspended dividend to recover RDTOH in a later year, under certain conditions.

Specifically, a suspended dividend may be released if the recipient corporation (or any affiliated corporations) pay taxable dividends to individuals or third-party corporations, and the following conditions are met:

• The subsequent taxable dividends total an amount equal to or greater than the suspended dividend.
• No acquisition of control has occurred between the date of the suspended dividend and the end of that later year.
• No other corporation (other than the payer corporation) has relied on any of those subsequent dividends to obtain an RDTOH refund.

Note that these rules operate on an all-or-nothing basis. A corporation will not receive a partial refund of RDTOH if the total subsequent dividends falls even marginally short of the suspended dividend amount.

Who is affected?

These rules primarily affect corporate groups with tiered ownership structures where:

• Corporations within a group have different balance-due dates, and investment income or capital gains are earned in a lower-tier corporation, or
• A corporation earning investment income or capital gains is owned by a trust that has another corporation as a trust beneficiary, and the corporations have a non-calendar year end.

Even corporations with aligned year‑ends but staggered tax balance-due dates could trigger the proposed rules. For example, an operating company claiming the small business deduction may have a balance‑due date three months after year‑end, while its subsidiary earning only passive income may have a balance‑due date two months after year‑end. 

What are the exceptions?

There are only a few circumstances in which the dividend suspension rules don’t apply. These include where:

• The dividend recipient pays a subsequent dividend up the affiliated chain of corporations equal to or greater than the dividend received on or before the original payer's balance-due date
• Control of the dividend payer is acquired by an unrelated person within 30 days of the dividend, or
• The dividend arises from a share redemption in the course of a reorganization.

Potential planning opportunities

There are several restructuring actions that could help mitigate the impact of these rules. 

Example 1: Aligning corporate year-ends within a group may help avoid the suspension rules altogether.

Note that this may not necessarily be commercially practical and the CRA would need to pre-approve a change of year-end. In addition, a change of year-end would require an assessment of any potential accounting implications that could arise.

It’s also critical to recognize that the rules are triggered by misaligned balance-due dates, not misaligned tax year-ends.

Example 2: Where a lower-tier corporation in the group is earning investment income, restructuring to move the investment to the top-tier entity may be beneficial. This could prevent future accrual of RDTOH that might later be affected by these proposed rules.

Example 3: Taxpayers may consider moving significant existing RDTOH balances up to a top-tier entity through intercorporate dividends before the rules take effect. However, certain anti-avoidance provisions could apply and must be considered.   

Takeaway

When considering structural changes in anticipation of these rules, it’s important to recognize that they’re still draft proposals and may be revised as they move through the legislative process. For help navigating these potential changes and identifying strategies tailored to your corporate group, contact your local advisor or reach out to us here.

^Disclaimer  

^{The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or an opinion provided by Doane Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.}