Depending on the type of dividend received, the tax treatment can be different. Dividends received by one private Canadian corporation from another connected private Canadian corporation are generally not taxable (a connected corporation is one which is either controlled by another corporation or owns more than 10% of the voting shares of another corporation). The dividend received is deducted from the taxable income. If this was not the case then the same stream of income could be subject to tax numerous times as it passed from corporation to corporation.

Dividends received from a corporation that is not connected (often referred to as portfolio dividends) are subject to Part IV tax of 33 1/3%. This Part IV tax is one element of the Refundable Dividend Tax On Hand (RDTOH) balance available at the ratio of $1 tax for every $3 dividend when the company passes this dividend on to its shareholders. If the shareholder is another corporation, it will, in turn, be assessed Part IV tax and claim a refund when it passes the dividend on.

A corporation can receive eligible or non-eligible dividends. Both are still subject to the same tax implications depending on whether the corporations are connected or not. If a corporation receives eligible dividends, the amount of the dividends is added to the recipient corporation’s General Rate Income Pool (GRIP) so that it may pass the dividend on as an eligible dividend to its shareholders, preserving the tax treatment of the income stream.