Schedule 3. Dividends Received and Part IV Tax
Schedule 3 (T2SCH3) reports dividends received and paid by a corporation and computes Part IV refundable tax on portfolio and connected-company dividends.
Definition
Schedule 3 (T2SCH3) serves three functions: it identifies taxable dividends received (supporting the s.112 inter-corporate dividend deduction on T2 line 320), it reports taxable dividends paid, and it calculates Part IV tax, a refundable tax targeted at dividend income that would otherwise escape the integrated Canadian tax system when held in a private corporation.
Every corporation that received or paid taxable dividends during the year must file Schedule 3. The schedule ties directly to pools, since Part IV tax funds the non-eligible RDTOH (or eligible RDTOH, depending on the dividend source).
Key rules
Part IV tax rates (2026):
| Dividend source | Part IV rate | Goes to pool |
|---|---|---|
| Portfolio dividends (non-connected payer) | 38 1/3% | Non-eligible RDTOH (or ERDTOH if eligible) |
| Connected payer dividends | Proportional to payer's dividend refund | Same pool the payer drew from |
| Capital dividends received | 0% (tax-free) | None (CDA credit) |
Connected corporations (s.186(4)): A payer is connected if the recipient controls it, or owns more than 10% of voting shares AND more than 10% of fair market value. Dividends from connected payers trigger Part IV only to the extent the payer received a dividend refund.
Key schedule sections:
- Part 1: Dividends received from non-connected Canadian corporations (portfolio). 38 1/3% Part IV applies automatically.
- Part 2: Dividends received from connected corporations. Part IV equals the recipient's percentage of the payer's dividend refund.
- Part 3: Taxable dividends paid by the filer during the year, split between eligible and non-eligible.
- Part 4: Total Part IV tax payable.
Example
A CCPC receives $10,000 in eligible dividends from a Canadian public company (portfolio) and $40,000 in non-eligible dividends from a connected sister company. The sister claimed a $6,000 dividend refund and paid $60,000 in total non-eligible dividends that year.
Common mistakes
Forgetting that Part IV tax is payable even though the dividend itself is deducted under s.112. The deduction and the tax are separate mechanisms. Both apply simultaneously.
- Miscoding eligible versus non-eligible dividends on the T5 slip received, which routes the Part IV refund to the wrong RDTOH pool.
- Treating a capital dividend (box 28 on T5) as taxable. Capital dividends are tax-free and go to rather than Schedule 3.
- Not reducing connected-company Part IV by the payer's proportional refund.
- Missing Part 3 when the corporation paid dividends but received none.
Related concepts
Authority
- CRA Form T2SCH3
- Income Tax Act Part IV
- Income Tax Act s.112
- Income Tax Act s.186
- CRA Guide T4012
See also
Related entries
Refundable Dividend Tax On Hand (RDTOH)
RDTOH is a refundable tax pool tracked by private corporations that returns a portion of federal tax on investment income when taxable dividends are paid to shareholders, split since 2019 into ERDTOH and NERDTOH.
General Rate Income Pool (GRIP)
GRIP is a notional pool tracked by CCPCs that represents income taxed at the general corporate rate and supports the payment of eligible dividends to shareholders.
Low Rate Income Pool (LRIP)
LRIP is the notional pool tracked by non-CCPCs that restricts their ability to pay eligible dividends, forcing any LRIP balance to be distributed as non-eligible dividends first.
Capital Dividend Account (CDA)
The Capital Dividend Account is a notional tax pool of a private corporation that allows certain amounts, primarily the non-taxable half of capital gains and life insurance proceeds, to be paid to shareholders as tax-free capital dividends.
Eligible vs. Non-Eligible Dividends
Canadian dividends are grossed up and taxed with an offsetting dividend tax credit; eligible dividends come from high-rate corporate income and receive a larger credit.
This entry is for general reference. It does not constitute professional tax advice. Consult a qualified Canadian accountant for your specific situation.