Global Law Experts Logo

Find a Global Law Expert

Specialism
Country
Practice Area
awardsr

Awards

Since 2010, the Global Law Experts annual awards have been celebrating excellence, innovation and performance across the legal communities from around the world.

Refundable Dividend Tax On Hand (RDTOH) | David J. Rotfleisch

posted 3 years ago

 

Running an incorporated business in Canada typically comes with several tax advantages. This is why many small business owners rely on their private corporations to save for their families and future retirement. 

Most Canadian small business corporations generate two types of income—active and passive income. Companies can acquire the former through operational business activities and the latter from rents, investments and dividends.      

Prior to 2019, the first $500,000 of active business income of private corporations was eligible for a lower small business tax rate. A private corporation could also refund a portion of the tax on their passive investment income when paying taxable dividends to a shareholder. 

But since the new measures set by the Government of Canada around passive income in private corporations took effect, access to small business deduction and refundable taxes has become limited. 

Beginning 2019, Canadian-controlled private corporations (CCPCs) and other incorporated companies can make up to $50,000 of passive investment income without impacting the small business deduction. If a corporation exceeds that amount, it can lose $5 of the deduction for every $1 of its passive income. 

In addition, the rules also restrict the ability to recover tax paid on passive income. When a corporation pays eligible dividends, it may not receive a refund from its refundable dividend tax on hand (RDTOH) account. 

While these changes can be confusing and challenging, they may allow more opportunities for better corporate tax planning. Specifically, the RDTOH mechanism can provide more clarity when planning for investing in and withdrawing funds from your corporation. 

Let’s look more into what RDTOH is, why it is present in the Canadian tax system, and exactly how it works. 

 

What is a Refundable Dividend Tax On Hand?

Refundable dividend tax on hand (RDTOH) is a tax integration mechanism available to CCPCs. A CCPC is simply a Canadian corporation not controlled by a public corporation, a non-resident of Canada, or both. 

The primary purpose of RDTOH is to tax income at the same overall rate, whether you earn it directly or within a corporation. Such taxes prevent a tax deferral on investment income at the corporate level. 

So, if you’re a taxpayer who generates passive investment income through a corporation, you won’t receive a tax-deferral advantage on income tax any longer. But under certain circumstances, RDTOH allows a corporation to refund a portion of income tax paid on passive investment income. 

The refundable portion is calculated based on the aggregate investment income earned by a corporation, along with the dividends it receives from non-connected corporations. All these are added to the corporation’s RDTOH account, which monitors the refundable taxes paid to the Canada Revenue Agency (CRA).

So, with RDTOH accounts, you can track the extra tax you’re paying on investment income. It also protects your right to claim a tax credit every time you pay a taxable dividend to a shareholder. However, there are now two pools of RDTOH: eligible and non-eligible. 

Eligible Refundable Dividend Tax On Hand (ERDTOH)

The eligible RDTOH (ERDTOH) will track refundable taxes paid on eligible dividends received under Part IV of the Income Tax Act.  This account will be refundable by paying either eligible or non-eligible taxable dividends. Also, a corporation can only acquire a dividend refund from this account if there’s no remaining balance left in the NERDTOH. 

Non-Eligible Refundable Dividend Tax On Hand (NERDTOH)

The non-eligible RDTOH (NERDTOH) will track the refundable taxes paid on passive investment income except for the corporation’s eligible dividends. This account will only be recoverable upon the payment of non-eligible dividends. 

Note that a private corporation can only create RDTOH if they generate and report passive income. They can do it by acquiring capital gains in your corporate portfolio, receiving dividends or the income distributions from a CI Corporate Class or a pooled trust. 

 

What is Aggregate Investment Income?

Sometimes referred to as the refundable portion of Part I tax, aggregate investment income (AII) is a passive income. A private corporation generates this from property income, net taxable capital gains and portfolio dividends.

It is calculated by first adding the net taxable capital gains and total income from the property. Then deduct the sum from the business losses and related expenses for the year from property resources. 

AII is taxed depending on the province where the corporation carries on business. So far, the highest personal tax rate in a corporation is 50.17% in Ontario. 

The calculation for the tax rate of AII is also reliant on three adjustments:

  1. The small business deduction on CCPCs is not applicable.
  2. It does not qualify for a general corporate rate reduction.
  3. It is subject to an additional refundable tax of 6.67%. 

A private corporation pays 30.67% of the entire AII amount, which will go into the corporation’s RDTOH account. 

Note that the total federal tax rate on investment income is 38.66%. However, when considering the RDTOH in the effective tax rate paid by a private corporation, the federal government’s net of tax on AII is 8%. 

 

What is Part IV Tax?

Meanwhile, Part IV Tax refers to a private corporation’s assessable dividends. These are amounts paid as dividends or intended as payment of dividends that are deductible under section 112 or 113 of the Income Tax Act

Dividends eligible for deduction under section 1112 are taxable dividends received from another taxable Canadian corporation or a corporation resident in Canada controlled by the recipient. Note that these are only subject to Part IV tax when the corporation receives a dividend refund for paying the dividends. 

On the other hand, dividends deductible under section 113 are dividends received from foreign affiliates under certain conditions. 

Suppose the criteria for Part IV Tax apply; the corporation has to pay the tax at a rate of 38.33%. The entire amount is then added to the RDTOH account and becomes refundable.

Questions to Ask Before Hiring A Tax Lawyer

What’s your area of expertise, and how long have you practiced law?

You would want to hire a tax lawyer who has expertise in tax laws concerning your situation. But even if a lawyer specializes in that area, you also have to ensure that they have rich experience in the field. Make sure to ask about their area of specialization and how long they’ve been practicing it.  

Has there been a grievance or a lawsuit filed against you?

It’s essential to hire a reputable and honest tax lawyer. Be sure to check on their background. You can also ask whether they were a grievance or a lawsuit filed against you. Even if there was one, it doesn’t mean they are dishonest. 

How quickly do you respond to emails or calls promptly?

It’s essential to contact your lawyer as quickly as possible. Ask how promptly they respond to calls or emails. The last thing you would want is to have a lawyer you cannot reach out to when you’re having tax problems. 

Are your fees fixed or hourly?

You would want to know if you can afford the lawyer’s services. Make sure to ask whether the lawyer’s fees are fixed or based on the number of hours they work on your case. Being transparent with payment will ensure good faith between the lawyer and you.

 

If you have questions about RDTOH, Aggregate Investment Income, Part IV tax, or any corporate tax provisions, contact our expert Toronto tax lawyers from Taxpage today!

 

“Did you know that RDTOH is a tax integration mechanism? In other words, the goal of tax integration is to eliminate certain tax benefits obtained by using corporations and not penalize taxpayers who earn corporate income.”

– Taxpage

How Does Dividend Refund Provision Work?

As discussed above, the RDTOH account accumulates the tax paid on aggregate investment income and the assessable dividends under Part IV. 

When a corporation pays out a taxable dividend and there’s a positive balance in the RDTOH account, the corporation will receive a dividend refund at a rate of 38.33% of all the taxable dividends paid in a year. 

Let’s say your corporation has an existing RDTOH balance of $580 and pays taxable $2000 to shareholders. The dividend refund is equal to the lesser of: 

  • The RDTOH balance of $580 at the end of the year
  • 38.33% of the taxable dividends paid in the year of $766 (38.33% x $2,000)

In this case, the CRA will refund your entire RDTOH account balance of $580 since the lesser figure is used following the dividend rule. 

Meanwhile, suppose the corporation does not have an RDTOH balance. In that case, there will be no dividend refund or other tax relief forms for reporting and paying dividends. This will result in double taxation. 

Need To Learn More? Contact Taxpage Today!

Understanding how the RDTOH mechanism works is helpful when making corporate investment decisions. However, rules surrounding dividend refunds can be complicated. You can visit Taxpage for information and tips on tax planning. We also offer tax solutions and consultation for individuals and businesses. Contact us today and see how we can help you.

 

Refundable Dividend Tax On Hand (RDTOH) FAQs

Are eligible dividends subject to Part IV tax?

Yes, Part IV tax applies to eligible dividends from connected Canadian corporations and foreign affiliates.

What is the purpose of an additional refundable tax?

An additional refundable tax is like a tax prepayment on the investment income. It’s intended to ensure the federal tax on the income is high enough to prevent corporations from using tax advantages of corporations on passive income.

How is the dividend refund calculated?

You can calculate dividend refunds in several ways. One method open to Canadian private corporations with RDTOH balances is to apply a dividend refund of 38.33%, accumulating aggregate investment income and accessible dividends.

Author

Find the right Legal Expert for your business

The premier guide to leading legal professionals throughout the world

Specialism
Country
Practice Area
LAWYERS RECOGNIZED
0
EVALUATIONS OF LAWYERS BY THEIR PEERS
0 m+
PRACTICE AREAS
0
COUNTRIES AROUND THE WORLD
0

Join

who are already getting the benefits
0
Sign up for the latest legal briefings and news within Global Law Experts’ community, as well as a whole host of features, editorial and conference updates direct to your email inbox. Naturally you can unsubscribe at any time.

Online Casino Reviews

  • Freeroll Poker Tournaments For Real Money
  • Australian Online Casino Real Money
  • Best Slot App To Win Real Money
  • Online Casino Real Money Australia
  • Best Paying Online Pokies
  • Wizard Of Oz Online Slots
  • All Slots Casino Mobile
  • Best Online Poker App Real Money
  • Best Online Casino To Play Roulette
  • Is Online Casino Legal
  • Online Casino That Accepts Paypal
  • Play Roulette For Real Money
  • Slot Apps To Win Real Money
  • Real Money Slots Online Usa
  • Safe Online Casino
  • Wizard Of Oz Slots
  • Real Online Pokies Nz
  • Biggest Online Casino In The World
  • Online Casino Pay With Paypal
  • Online Casino That Accept Paypal
  • Online Casino Canada Real Money
  • 3 Card Poker Online Real Money
  • Online Slots Real Money Canada
  • Best Online Poker Sites For Real Money
  • Real Money Poker App Android Usa
  • How To Make Money From Online Casino Bonuses
  • Real Money Poker App Iphone
  • How To Play Blackjack Online For Real Money
  • Best Slots To Play
  • Top 10 Online Pokies
  • Best Poker Apps Real Money
  • Online Casino Legal
  • Best Payout Online Casino Uk
  • Win Money Online Slots
  • Online Poker Nj Real Money
  • How To Win Online Slots
  • Casino Gaming License
  • Play Real Pokies Online
  • Blackjack Sites For Real Money
  • Real Money Casino Games For Android
  • Best New Online Slots
  • Flaming 777 Slots Games
  • Online Blackjack With Live Dealers
  • How To Play Online Slots
  • Facebook Casino Games Real Money
  • Online Casino With No Minimum Deposit
  • How To Beat Online Slots
  • Online Casino License
  • The Big Payback Slots
  • Royal Vegas Online Casino Withdrawal
  • Online Casino Minimum Deposit 5
  • Online Pokies Real Money Australia
  • Las Vegas Usa Online Casino
  • Real Money Poker App Android
  • Wheel Of Fortune Slots
  • Game Of Thrones Slots
  • Online Poker Real Money Usa Legal
  • Best Online Casino European Roulette
  • Blackjack Online Real Money Paypal
  • Online Video Poker Real Money Usa
  • How To Create An Online Casino
  • Lucky Nugget Online Casino Mobile
  • How To Withdraw Money From Online Casino
  • Platinum Play Online Casino Download
  • Online Casino For Usa Players
  • Best Online Casino Usa Real Money
  • Online Roulette Real Money Usa
  • Best Real Money Poker Sites
  • Android Slots Real Money
  • How To Start An Online Casino Business
  • How To Start An Online Casino
  • How To Start An Online Gambling Site
  • Best Online Casino For Blackjack
  • Play Baccarat Online For Money
  • Online Pokies New Zealand
  • Best Slots To Play At Golden Nugget
  • Slots Of Vegas Online Casino
  • Best Online Pokies Site
  • How To Beat Online Roulette
  • New Zealand Online Pokies
  • Online Poker Mobile Real Money
  • Which Online Slots Payout The Most
  • Is Online Casino Legal In India
  • Online Casino Software For Sale
  • Best Online Casino For Craps
  • Hard Rock Casino Slots
  • Win Real Money Online Pokies
  • Online Casino With Highest Payout Percentage
  • Poker Apps With Real Money
  • Online Roulette Real Money Review
  • Full Tilt Poker Real Money
  • Online Casino 5 Dollar Minimum Deposit
  • Online Roulette With Real Money
  • Best Online Roulette For Real Money
  • I Migliori Casino Online Italiani
  • Best Payout Online Slots
  • How To Play Baccarat Online
  • Play Casino Card Game Online
  • Play Blackjack Online For Real Money
  • Best Paying Online Slots
  • Casino License Cost
  • Online Poker Real Money California
  • Safe Online Casino Australia
  • Online Roulette Australia Real Money
  • Online Poker Real Money Texas
  • Online Roulette Real Money Paypal
  • Online Slots Australia Real Money
  • Golden Nugget Online Casino Review
  • Casino Games To Win Real Money
  • Online Pokies Australia Real Money
  • Online Gambling Blackjack Real Money
  • Win Real Money Playing Slots
  • How To Win Roulette Online
  • Aristocrat Pokies Online Real Money
  • Hollywood Casino Online Slots
  • Play Online Keno For Real Money
  • What's The Best Online Casino
  • Triple Double Diamond Slots
  • Play Roulette Online With Real Money
  • Roulette Online For Real Money
  • Play Roulette Online Real Money
  • Best Online Pokies Real Money
  • Big Red Pokies Online
  • How To Win At Online Blackjack
  • What Is The Best Online Roulette Site
  • Real Money Online Pokies
  • Spin To Win Slots
  • Ruby Slots Online Casino
  • Wheel Of Fortune Online Casino
  • Spin Palace Flash Casino Online
  • Online Poker Real Money App
  • Online Casino With Paypal Deposit
  • How To Win At Online Roulette
  • Can You Win Real Money On Slot Apps
  • Is Ignition Casino Safe
  • Online Casino Blackjack Real Money
  • Online Casino Win Real Money Usa
  • How To Make Money Online Casino
  • Online Casino Real Money Reviews
  • Slot Games To Win Real Money
  • Jackpot City Online Casino Download
  • Online Pokies Real Money
  • Casino War Online Real Money
  • Online Casino No Minimum Deposit
  • Play Wheel Of Fortune Slots Online
  • Best Online Casino Game To Win Money
  • Online Casino Without Wagering Requirements
  • Online Slots For Real Money Usa
  • Legal Online Casino Australia
  • How Do Online Slots Work
  • Best Online Casino For Us Players
  • Online Play Casino Roulette Game
  • Online Blackjack Real Money Australia
  • Real Casino Games Real Money Online
  • Online Slot Machines Real Money Paypal
  • The Best Online Casino For Roulette
  • What Online Casino Pays Out The Most
  • Start Your Own Online Casino
  • Legal Online Casino
  • Online Live Roulette Casino Game
  • Playing Blackjack Online For Real Money
  • Online Penny Slots Real Money
  • Best Online Blackjack For Money
  • How To Win Online Roulette
  • Real Money Poker Sites Usa
  • Best Time To Play Slots
  • Online Keno For Real Money
  • Best Payout Online Slots Uk
  • Online Slots Real Money Reviews
  • Best Online Pokies Nz
  • What States Allow Online Gambling
  • Best Real Money Poker App
  • Online Slots To Win Real Money
  • Real Money Slots App Iphone
  • Jackpot City Flash Casino Online
  • Ignition Casino Legit
  • All Star Slots Casino
  • How To Play Online Casino
  • Real Time Gaming Slots
  • Online Video Poker Real Money
  • How To Play Roulette Online For Money
  • How To Win On Online Slots
  • Age Of Gods Slots
  • Online Real Casino Money Games
  • Best Online Slots To Play
  • Online Poker California Real Money
  • Is Jackpot City Casino Legit
  • How To Win At Online Slots
  • Play Poker For Real Money
  • Safe Online Pokies Australia
  • Best Way To Play Slots
  • How To Play Casino Online
  • Play Online Roulette For Money
  • Online Casino Australia Real Money
  • Which States Allow Online Gambling
  • Play Keno Online Real Money
  • How To Win Online Blackjack
  • Online Blackjack With Real Dealers
  • How To Open Online Casino
  • What Are The Best Online Slots To Play
  • Big Win Casino Slots
  • Spin Palace Online Casino Australia
  • Best Slots To Win On
  • Casino Slots Win Real Money
  • Slots Magic Online Casino
  • Blackjack Online For Real Money
  • Slot Machine App Win Real Money
  • Online Casino Not Paying Out
  • Slots That Pay Out Real Money
  • Online Pokies Australia Reviews
  • Online Casino Minimum Deposit 1
  • Jackpot City Online Casino Review
  • Live Dealer Baccarat Online Casino
  • Online Casino Apps For Android
  • Online Casino Paypal Deposit Australia
  • Online Casino With Live Dealer
  • How To Play Blackjack Online
  • Slots To Win Real Money
  • Wheel Of Fortune Online Slots
  • Play Quick Hit Slots Online
  • Can You Count Cards In Online Blackjack
  • Palace Of Chance Online Casino
  • How To Play Roulette Online
  • Good Slots To Play
  • Which Online Casino Pays Out The Most
  • Heart Of Vegas Casino Slots
  • Best Online Casino For Canadians
  • Australian Online Pokies Real Money
  • Mohegan Sun Online Casino Nj
  • Online Casino Live Games Best Uk
  • Best Online Casino Australia Reviews
  • Play Pokies Online Real Money
  • Best Online Casino For Usa Players
  • How To Win Online Casino
  • Play Blackjack For Real Money
  • Best Slots On Bovada
  • Online Keno Real Money Usa
  • Online Slots Real Money Paypal
  • Best Poker Sites For Real Money
  • Safe Casino Sites
  • The Best Online Slots
  • Play Keno For Real Money
  • Real Online Pokies Australia
  • Queen Of The Nile Slots
  • Mummys Gold Casino Online Casino
  • Play Keno Online For Real Money
  • Best Poker Websites Real Money
  • Lucky Nugget Online Casino Download
  • Best Online Casino For Roulette
  • Play Roulette For Money Online
  • Video Slots Mobile Casino
  • Best Time To Play Online Slots
  • Best Real Money Online Poker
  • Play Blackjack Online With Friends
  • Play Baccarat Online For Real Money
  • Is Silver Oak Casino Legit
  • Big Fish Casino Real Money
  • Can You Win Real Money On Caesars Slots
  • Game Of Thrones Slots Casino
  • Best Online Slots Payout Percentage
  • Play Online Pokies For Real Money
  • Play Pokies Online Australia
  • High 5 Casino Real Slots
  • The Best Online Pokies
  • Online Pokies That Accept Paypal
  • Heart Of Vegas Slots
  • How To Play Online Roulette
  • Best Poker App Real Money
  • Best Online Casino Fast Payout
  • Best Slots At Wind Creek Casino
  • Online Casino 10 Minimum Deposit
  • Play Roulette Online For Money
  • Us Real Money Poker Sites
  • How To Win In Online Casino
  • Best Online Pokies Australia Review
  • Where To Play Roulette Online For Real Money
  • How To Beat Online Casino Slot Machines
  • Highest Payout Online Slots
  • Best Paying Online Casino Slots
  • Golden Tiger Online Casino Review
  • Online Casino With Live Dealers
  • Play Roulette Online For Real Money
  • Best Slots To Play At Casino
  • Slot Machine Games Win Real Money
  • Most Popular Online Casino Games
  • Casino Slots App Real Money
  • Online Casino Real Money Canada
  • Online Real Money Pokies
  • Online Roulette Game Real Money
  • Online Casino Roulette Real Money
  • Best Place To Play Roulette Online
  • Online Casino Book Of Ra Paypal
  • Online Blackjack With Real Money
  • Play Online Blackjack For Real Money
  • Is There A Slot Machine App For Real Money
  • Royal Vegas Online Casino App
  • Best Casino Slots To Play
  • Most Popular Online Slots
  • Best Way To Win At Slots
  • Slots You Can Win Real Money
  • Play Roulette Online Real Money Usa
  • Online Casino Real Money Paypal
  • Online Casino Australia Legal
  • Treasures Of Troy Slots
  • Online Casino For Us Players
  • Where Can I Play Blackjack Online For Real Money
  • Online Casino Paypal Book Of Ra
  • Online Roulette For Real Money
  • Best Online Blackjack Real Money
  • Poker App For Real Money
  • Jackpot Magic Slots Facebook
  • Best Online Casino Real Money Usa
  • Best Online Casino New Zealand
  • The Four Kings Casino And Slots
  • How To Play Slots Online
  • Best Online Pokies Australia
  • Usa Online Slots Real Money
  • Real Money Casino Android App
  • Online Slot Machines That Pay Real Money
  • Online Pokies Real Money Nz
  • Online Pokies Real Money App
  • Play Igt Slots Online
  • Best Casino Slots To Win Money
  • Online Casino Business For Sale
  • Play N Go Slots
  • Poker Apps For Real Money
  • Lucky Slots Real Money
  • All Slots Online Casino
  • Best Online Pokies Real Money Australia
  • Online Pokies Win Real Money
  • Best Online Casinos For Roulette
  • Pay Slots For Real Money
  • Best Online Poker Real Money
  • Slots App Win Real Money
  • Play Online Roulette For Real Money
  • Is Ignition Casino Legit
  • Wheel Of Fortune Slots Online
  • Lotsa Slots Real Money
  • Video Poker Online Real Money
  • Online Slots Usa Real Money
  • Play Blackjack Online Real Money
  • Jackpot City Online Pokies
  • Video Slots Online Casino
  • Is 888 Casino Legit
  • Online Slot Games That Pay Real Money
  • Prepaid Visa Card Online Casino
  • How To Stop Online Gambling
  • Best Slots To Play Online
  • Online Blackjack For Real Money
  • Slot Apps For Real Money
  • Mobile Slots Win Real Money
  • Newsletter Sign Up

    About Us

    Global Law Experts is dedicated to providing exceptional legal services to clients around the world. With a vast network of highly skilled and experienced lawyers, we are committed to delivering innovative and tailored solutions to meet the diverse needs of our clients in various jurisdictions.

    Social Posts

    See More:

    Contact Us

    Stay Informed

    Join Mailing List

    GLE