[IdaChen]

In the tax problem I am writing, I have a capital loss carry back. In completing the T2, I am trying to figure out where it will affect the RDTOH on the return.

Assuming the prior year's closing RDTOH is used as the current year's opening RDTOH, I don't see a line for "adjustments". As a result, it appears that the opening RDTOH must be adjusted for the effect of the capital loss carry back.

Will this cause any audit problems?

Am I missing something fundamental because I'm concentrating on how the return should be completed?

[IdaChen]

I called CRA on this issue and the (well-spoken) agent said that if the closing RDTOH agreed with their recalculation after the carry back, you were fine. She suggested adjusting the opening RDTOH so the amounts for the year would flow properly.

That is only an option if, after the opening RDTOH is adjusted, the dividend refund for the previous year is less than the adjusted figure. If it is larger, the form does not use the negative number and the closing RDTOH will not be correct. In this case, the closing RDTOH itself must be adjusted or there is a possibility of an excessive dividend refund.

Looking further into the issue, I was curious as to what happens if a capital loss is carried back and as a result the carry back year had an excessive dividend refund. I found that the excess dividend refund must be repaid, along with interest. I assume it will be taken out of the carry back refund.

This might come as a nasty surprise to a client expecting a large refund cheque.

Rulings document 2001-0100755

Issue 1: Whether the loss carry back, which would reduce taxable income to nil, would cause the T/P to lose the dividend refund (DR) for the year to which the loss was applied?
Position 1: Yes
Reason 1: The loss would reduce the RDTOH at the end of the year to nil.

Issue 2: Whether the T/P would have to repay the DR for the year and pay interest on the cancelled dividend refund.
Position 2: Yes to both.