Troubleshooting – Schedule 7, Aggregate Investment Income and Income Eligible for the Small Business Deduction – Incorrect amount on line 730 when a dividend deductible under paragraph 113(1)(c) ITA is entered in Schedule 3

  • Article Type: Problem Resolution
  • Last Modified: 2019-11-01

Symptoms

The amount entered on the line Dividends deductible from taxable income under paragraph 113(1)(c) ITA in Part 1 of Schedule 3, Dividends Received, Taxable Dividends Paid, and Part IV Tax Calculation (S3), is not included in the calculation on line 730, Dividends from connected corporations, of Part 2. However, a dividend received from a foreign affiliated corporation must be included on line 730 when this corporation would be a connected corporation under subsection 186(4) ITA, if this subsection applied. Therefore, the small business deduction for the current year or the next might be lower than the allowable amount.

 

Environment

Cantax T2 19.1.3xx.100
Cantax T2 19.1.3xx.106
 

Cause

In the case of a connected corporation, the amount entered on the line Dividends deductible from taxable income under paragraph 113(1)(c) ITA of Schedule 3 is not included in the amount calculated on line 730 of Part 2 while it should.


Example:
Canadian Corporation A received à $40,000 dividend from connected Canadian Corporation B and a $25,000 dividend from foreign affiliated Corporation C. 

Schedule 3

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Schedule 7

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Note that the amount carried forward to line 2G, Dividends from connected corporations for each tax year that ended in the preceding calendar year, in Part 2 of Schedule 7 , as well as the amount carried forward to the field on the first line of column 10, Total adjusted aggregate investment income for the preceding year (tax years starting after 2018), in the table Allocating the business limit of Schedule 23, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Business Limit (S23), do not take into account this dividend amount when, prior to carry forward, the file was not corrected.

Resolution

In a situation where the corporation received a dividend from a foreign affiliated corporation that is included in the amount entered on the line Dividends deductible from taxable income under paragraph 113(1)(c) ITA in Schedule 3, and where a foreign affiliated corporation corresponds to the definition of a connected corporation in subsection 186(4) ITA, add the dividend received from this corporation to the amount calculated on line 730 in schedule 7 and then enter the result on line 730, using an override.

Example:
Foreign affiliated corporation C is a connected corporation as defined in subsection 186(4) ITA. The amount to enter on line 730 is then $65,000 ($40,000 + $25,000). 

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For files that were already carried forward and that are affected by this correction:
  • if the file covers the corporation’s first tax year starting after 2018, verify that the amount carried forward to line 2G, Dividends from connected corporations for each tax year that ended in the preceding calendar year, in Part 2 of Schedule 7 includes only the portion of the amount on the line Dividends deductible from taxable income under paragraph 113(1)(c) ITA in Schedule 3 that was received for a connected corporation;
 
  • if the file covers another tax year starting after 2018, subtract the amount added to line 730 (to correct the original file) from the amount carried forward to the first field of column 10, Total adjusted aggregate investment income for the preceding year (tax years starting after 2018), in the table Allocating the business limit of Schedule 23 and enter the result manually in that field.

Additional Information

This problem will be corrected in Cantax T2 19.2.3xx.126.
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 Solution Id Troubleshooting-Schedule-7-Aggregate-Investment-Income-and-Income-Eligible-for-the-Small-Business-Deduction-Incorrect-amount-on-line-730-when-a-dividend-deductible-under-paragraph-113-1-c-ITA-is-entered-in-Schedule-3
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