What is RDTOH (Refundable Dividend Tax on Hand)?
Refundable Dividend Tax on Hand is a mechanism that allows a CCPC to recover a portion of the tax paid on investment income when it pays taxable dividends to shareholders. When a CCPC pays taxable dividends, CRA refunds 38.33% of those dividends from the RDTOH balance. This prevents investment income from being permanently double-taxed at both the corporate and personal levels.
Current Rate (Corporate fiscal year)
Refund rate: 38.33% of taxable dividends paid, limited to the RDTOH balance
Example
A CCPC earns CAD 100,000 of interest income, taxed at approximately 50.67% (combined federal and provincial). This generates roughly CAD 30,670 of RDTOH. When the corporation pays CAD 80,000 of non-eligible dividends, it receives a dividend refund of 38.33% x CAD 80,000 = CAD 30,664 (limited to the RDTOH balance). The refund reduces the effective corporate-level tax on the investment income.
How RDTOH (Refundable Dividend Tax on Hand) works in Canada
The Refundable Dividend Tax on Hand (RDTOH) mechanism is central to understanding why CCPCs are taxed at high rates on investment income, and why the integration system is designed to achieve the same total tax outcome whether income is earned personally or through a corporation.
**The integration principle**
Canadian tax law is designed so that the total tax paid on income earned through a corporation and then distributed to a shareholder should approximate the tax that would have been paid had the income been earned directly by the individual. This is called tax integration. For investment income, CCPCs are taxed at a high combined rate (approximately 50-52% federally and provincially) specifically because a refundable portion will be returned when dividends are paid. The after-refund corporate tax rate more closely approximates the personal marginal rate, ensuring the corporate structure does not provide a long-term tax deferral on investment income.
**Two RDTOH pools**
Since 2019, there are two RDTOH pools. The Eligible RDTOH (ERDTOH) pool is generated by taxable dividends received from non-connected corporations and is refundable only when eligible dividends are paid. The Non-Eligible RDTOH (NERDTOH) pool is generated by other investment income (interest, rents, taxable capital gains) and is refundable when either eligible or non-eligible dividends are paid. This change was designed to prevent CCPCs from generating eligible dividends cheaply and then claiming an RDTOH refund.
**Connected corporation rules**
Dividends received by a CCPC from a connected corporation (a corporation in which the CCPC has more than a 10% equity interest) do not generate RDTOH in the recipient corporation. Instead, the payer corporation's RDTOH is transferred to the recipient when the dividend is paid. This prevents the RDTOH refund mechanism from being multiplied by layering corporations.
**Planning implications**
The RDTOH mechanism has significant planning implications for CCPC owner-managers. If a CCPC accumulates large amounts of investment income without paying dividends, the RDTOH balance grows but no refund is received. To recover the RDTOH, dividends must be paid. However, paying dividends increases the individual shareholder's personal tax in the year of receipt. The decision of when to pay dividends (and trigger the RDTOH refund) must be balanced against the individual's personal income situation in that year.
Related terms
A Canadian-Controlled Private Corporation is a private corporation controlled by Canadian residents. CCPCs qualify for the 9% Small Business Deduction rate on active business income, the 35% refundable SR&ED investment tax credit, and the Lifetime Capital Gains Exemption on a qualifying share sale.
The Small Business Deduction reduces the federal corporate tax rate from 15% to 9% for Canadian-Controlled Private Corporations on the first CAD 500,000 of active business income per year. The deduction is subject to reduction for associated corporations, passive investment income, and taxable capital above CAD 10 million.
The T2 is the annual corporate income tax return filed with the Canada Revenue Agency by all Canadian resident corporations and certain non-resident corporations with a taxable presence in Canada. The return is due within 6 months of the corporation's fiscal year-end. The balance of corporate tax owing is due 2 months after year-end (3 months for eligible CCPCs).
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