Section 112 and subsection 138(6) of the Income Tax Act (Canada) allow corporations that receive inter-corporate dividends to claim a deduction equal to the amount of dividends received.
Section 112 dividends refer to a provision in the Act that allows corporations to deduct dividends received from other taxable Canadian corporations from their taxable income. The purpose of Section 112 is to avoid double taxation on inter-corporate dividends, ensuring that dividends are taxed only once, ultimately at the individual shareholder level, rather than multiple times as they move between corporations.
Key Features of Section 112 Dividends:
Deductibility:
A Canadian corporation can deduct the full amount of dividends received from another taxable Canadian corporation from its taxable income. As a result, the receiving corporation does not pay tax on those dividends.
Eligible Corporations: This deduction applies to dividends received from taxable Canadian corporations, including both public and private corporations that are resident in Canada and subject to Canadian income tax.
Avoidance of Double Taxation:
Section 112 prevents the same dividends from being taxed multiple times as they pass between corporate entities. The dividends are only taxed when they are ultimately distributed to individual shareholders.
Refundable Dividend Tax on Hand (RDTOH):
Although Section 112 allows a deduction, private corporations receiving dividends may still be subject to Part IV tax, which is added to their RDTOH account. This tax can be refunded when the corporation pays dividends to its shareholders.
Example:
Corporation A pays a $100,000 dividend to Corporation B. Both are taxable Canadian corporations.
Corporation B can claim a Section 112 deduction of $100,000, meaning it does not pay tax on the dividend.
If Corporation B is a private corporation, it may still need to pay Part IV tax on this dividend but can recover the tax when it pays dividends to its shareholders.
In Summary:
Section 112 provides a mechanism for Canadian corporations to avoid double taxation on inter-corporate dividends by allowing them to deduct these dividends from their taxable income.
For more information, please visit the Canada Revenue Agency:
Canada Revenue Agency
