ACCA Advanced Taxation (ATX) Practice Exam

How do you gross up dividends from an IIP trust for income tax purposes?

1. Amount received x 100/85

2. Amount received x 100/91.25

3. Amount received x 100/80

4. Amount received x 100/70

The correct answer is: Amount received x 100/91.25

To gross up dividends from an Individual Investment Plan (IIP) trust for income tax purposes, the correct approach involves understanding the concept of grossing up and the tax credits associated with dividends. The purpose of grossing up is to reflect the pre-tax amount that corresponds to the net amount received by the individual. In the context of Canadian taxation, the correct method involves using the gross-up factor applicable to the type of dividend received. For eligible dividends, the gross-up factor is typically applied to reflect the fact that the income has been taxed at a corporate level before being distributed as dividends to shareholders. In this case, grossing up using the formula where the amount received is multiplied by 100/91.25 recognizes the specific tax treatment of eligible dividends. This factor accounts for the corporation tax rate and ensures that the total amount taken into consideration for income tax purposes accurately reflects the gross income that corresponds to the net dividends received. The choice that indicates multiplying by 100/91.25 is appropriate, as it accounts for the current gross-up rate for eligible dividends in Canada as of the time when this information is relevant. This process ensures the taxpayer can properly report their income and take into account any available dividend tax credits that alleviate the overall tax liability.