This publication provides a detailed analysis of subsection 186(7) of the Income Tax Act, which contains a specialized rule governing how the concept of “connected” should be interpreted for the purposes of Part IV tax on assessable dividends. The paper examines the interaction between corporate control and the connected corporation rules, and how this specific provision can affect dividend refund mechanics.
Subsection 186(7) modifies the standard “connected” test in specific circumstances, requiring practitioners to look beyond the general definitions in section 186 when determining whether Part IV tax applies to dividends received between related corporations.
The distinction between de jure and de facto control has material consequences for whether corporations are considered “connected” under this provision, making share structure and voting rights critical planning considerations.
Advisors structuring intercorporate dividend flows must carefully evaluate ss. 186(7) to avoid unintended Part IV tax exposure, particularly in multi-tiered corporate structures where ownership percentages sit near the statutory thresholds.
We implement share reorganizations and corporate restructurings across all nine common law provinces.
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