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

Under the new dividend suspension rules, private corporations in Canada may no longer be able to defer income tax on investment income through dividends between corporations with staggered year-ends. These rules, introduced in Federal Budget 2025, 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 tax on investment income at rates comparable to the top personal marginal rate. However, when that income is 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 introduced new dividend suspension rules that restricts a corporation’s ability to recover RDTOH if insufficient dividends are paid out of the affiliated group on or before the original dividend payer’s corporate tax balance-due date.  

The federal government released a Notice of Ways and Means Motion that includes new details on these rules on May 4, 2026. These rules will be effective for tax years beginning on or after November 4, 2025. Given the broad scope of the rules, careful planning may be required to avoid unintended deferral or loss of RDTOH. 

What are the changes? 

The 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" if all the following conditions are met: 

• The dividend is paid to an affiliated private corporation. 
• The recipient corporation’s tax year in which the dividend is received ends after the payer corporation’s tax year in which the dividend was paid.  
• The dividend doesn’t meet a specific exception.  

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 unconnected corporations, and all following conditions are met: 

• The subsequent taxable dividends total an amount equal to or exceeds  the suspended portion of the dividend provided the subsequent dividends have the same eligible or non-eligible “character” as the suspended dividend. The suspended portion represents the part of the original dividend that would otherwise have given rise to an RDTOH refund to the payer.  
• An unrelated person hasn’t acquired control of the payer corporation since the date of the suspended dividend.  
• No other corporation (other than the payer corporation) has relied on any of those subsequent dividends to obtain an RDTOH refund or to avoid the rules (unless it relates to an excess amount of subsequent dividends paid over the suspended portion). 

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 subsequent dividends (having the same eligible or non eligible character) up the affiliated chain of corporations that equals or exceeds the suspended portion of the dividend on or before the payer's balance-due date. In addition, another corporation can’t use those subsequent dividends to avoid the dividend suspension rules, unless it relates to an excess amount paid over the suspended portion.  Control of the dividend payer is acquired by an unrelated person within 30 days of the dividend,  
• The company paid the dividend in anticipation of a third-party acquisition within 12 months, 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.   

Example 4: Where dividends are paid to a holding company with a misaligned year-end in anticipation of a sale, document the purpose of the dividend. However, positioning the dividend as part of the same series as the sale has other implications that must be considered, including for safe income purposes. Additionally, before an acquisition of control takes place, ensure all suspended dividends are released where there is RDTOH to be refunded; once control is acquired, the ability to release them will be lost. 

Example 5: Where a trust receives a dividend and distributes it to a corporate beneficiary, the beneficiary is treated as receiving the dividend at the end of the trust’s taxation year, not when the trust actually received it. In these circumstances, careful coordination of the timing of the original dividend, the trust distribution, and subsequent dividends paid by the beneficiary will be required to avoid the dividend suspension rules. 

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.}