Question

In most cases, what would be the tax treatment of dividends received by one canadian corporation from another canadian corporation?

a. taxable as property income at the basic federal tax rate.
b. added to net income and then subtracted when calculating taxable income.
c. initially, subject to the regular tax rates which would be fully refundable when dividends were paid to the shareholders.
d. grossed-up by 15% or 38%, depending on the tax rate paid by the paying corporation, and added to net income.

Answer 1

The tax treatment of dividends received by one Canadian corporation from another is typically included in net income and then subtracted, due to the Dividend Received Deduction, to lower the effective tax rate or exempt it from taxes.

Step-by-step explanation:

In most cases, the tax treatment of dividends received by one Canadian corporation from another Canadian corporation is added to net income and then subtracted when calculating taxable income. This system is known as the Dividend Received Deduction (DRD), which allows a corporation to receive dividends from other Canadian corporations with a reduced tax liability. The rationale behind the DRD is to mitigate the effects of triple taxation—once at the corporate level where earnings are generated, again when earnings are received as dividends by another corporation, and potentially a third time when dividends are distributed to individual shareholders. The exact mechanism for DRD can involve a notional addition to income followed by a deduction when determining taxable income, to ensure that this inter-corporate dividend flow is taxed at a much lower effective rate or exempt.