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.
Federal · Updated September 23, 2026
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.
Use Schedule 3 for the non-taxable and deductible dividends received, and dividend-refund information, identified in the CRA form instructions. Its Part IV calculations apply to private or subject corporations. The schedule ties directly to Refundable Dividend Tax On Hand (RDTOH) 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, including separate information for connected payers.
- Part 2: Part IV tax calculation.
- Part 3: Taxable dividends paid that qualify for a dividend refund.
- Part 4: Dividends included in total payments that do not qualify for that refund.
Example
A CCPC receives $10,000 in eligible dividends from a Canadian public company (portfolio) and $40,000 in non-eligible dividends from another corporation that meets the section 186(4) connected test. The payer claimed a $6,000 refund entirely from NERDTOH and paid $60,000 in total non-eligible dividends that year.
Portfolio dividend Part IV: $10,000 × 38 1/3% = $3,833.33 (Adds $3,833.33 to eligible RDTOH since dividend is eligible)
Connected dividend Part IV: Payer's refund attributable: $6,000 × ($40,000 / $60,000) = $4,000 (Adds $4,000 to non-eligible RDTOH)
Total Part IV tax: $7,833.33 Total s.112 deduction on T2 line 320: $50,000
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 as an ordinary taxable dividend. Schedule 3 has a section 83 dividend column that feeds Schedule 1 line 402. A Canadian-resident corporate recipient also considers its CDA. There is no general T5 box 28 capital-dividend reporting rule.
- Applying the portfolio rate to a connected dividend instead of the recipient’s applicable share of the payer’s refund. Confirm the payer’s refund source; a non-eligible payment can release ERDTOH after NERDTOH is exhausted.
- Missing Part 3 when the corporation paid dividends but received none.
Official source
CRA Schedule 3, including its connected-payer notes.
Related concepts
Sources
- CRA Form T2SCH3
- Income Tax Act Part IV
- Income Tax Act s.112
- Income Tax Act s.186
- CRA Guide T4012
See also
Keep the books behind these numbers current.
Ledg is Canadian bookkeeping for solo businesses and small corporations. Work on the web, or through Claude or ChatGPT on the Solo plan; nothing reaches a statement or tax total until you confirm it. The handoff pack gives your accountant the general ledger, trial balance, GST/PST summary and bank reconciliation. Free with no entry limit.