Inter-corporate dividend deduction — dividends between Canadian corporations
Deduction of taxable dividends received by corporation
Section 112 allows a corporation to deduct dividends received from other taxable Canadian corporations, preventing double taxation as dividends flow through corporate chains.
Plain-language explanation
Section 112 is the inter-corporate dividend deduction. Without it, a dividend paid by an operating company would be taxed first in the operating company's hands (as corporate income before the dividend) and again in the holding company's hands — double taxation.
How it works: When a Canadian corporation receives a taxable dividend from another taxable Canadian corporation, it can deduct the amount of the dividend received in computing its own taxable income. The dividend is effectively received tax-free at the corporate level.
The policy: Dividends are paid from after-tax income. Taxing that same income again as it moves between corporations in a corporate chain would be punitive. S.112 prevents this.
Interaction with Part IV tax: S.112 prevents income tax (Part I) on inter-corporate dividends. However, Part IV tax (s.186) may still apply if the recipient is a private corporation — but Part IV is refundable when dividends are paid out to individuals.
Restrictions: S.112 does not apply to dividends that are "stop-loss" transactions (designed to convert capital losses into deductions) or where the dividend was received as part of an avoidance arrangement. The synthetic equity arrangement rules in s.112(2.1) also restrict the deduction in certain situations.
Example
Holdco receives a $100,000 dividend from Opco (both CCPCs). Holdco deducts $100,000 under s.112 — no Part I income tax. If Holdco is a private corporation, Part IV tax of $38,333 applies instead, which is refundable when Holdco pays dividends to its shareholders.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
Synthetic equity arrangement rules under s.112(2.1) expanded. The rules deny the s.112 deduction when a corporation holds shares but has hedged its economic exposure through derivative arrangements (so it doesn't bear the economic risk of ownership). Updated rules target arrangements missed by earlier versions.
Before
Synthetic equity rules introduced in 2015; some arrangements escaped
After
Expanded synthetic equity arrangement rules denying s.112 where shares are effectively held short using derivatives or securities lending
Common questions
If my holding company receives dividends from my operating company, is it taxed? +
Not at the Part I level (income tax) — s.112 shelters the dividend. However, Part IV refundable tax (38.33%) may apply if the recipient is a private corporation. Part IV is refunded when the dividend is paid out to individual shareholders.
Can any corporation use the s.112 deduction? +
The deduction is available for dividends received from taxable Canadian corporations. Dividends from foreign subsidiaries are governed by a different regime. Certain restrictions apply (stop-loss rules, synthetic equity).
Key terms
Related sections
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 112. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.