RDTOH and Passive Investment Income in a CCPC, With Numbers

What RDTOH Is and Why Your Corporation Has One

If your corporation holds investments, you have probably seen your accountant mention RDTOH and moved on. It is worth ten minutes, because it explains why your corporation pays a punishing rate on investment income and how you get most of it back. Refundable dividend tax on hand is a notional account that tracks tax your corporation paid on investment income that it is entitled to get back later, when it pays taxable dividends to shareholders.

The system deliberately taxes investment income inside a CCPC at close to the top personal rate, then refunds part of it once the money is actually distributed. The reason it exists is integration. Without it, you could park investments inside a corporation, pay a low corporate rate and defer personal tax indefinitely. You are not being punished. You are being denied a deferral advantage. 

How Passive Investment Income Is Taxed Inside a CCPC

Passive income means aggregate investment income: interest, rents, royalties, foreign investment income, and taxable capital gains net of allowable losses. If your corporation owns property, the rental side of that figure follows the ordinary rules on taxing rental income in Canada. The mechanics, in order:

• The corporation pays regular Part I tax on that income, at a rate that is intentionally high.
• A portion of that tax, calculated as 30 and two thirds percent of aggregate investment income, is set aside as refundable and added to the RDTOH pool.
• When the corporation pays a taxable dividend, it recovers 38 and one third percent of the dividend paid, capped by the pool balance.

That second number is the one to remember. It is a statutory formula, not a refund of tax actually paid, so the calculation does not change with your provincial rate.  

ERDTOH vs NERDTOH: The Two Pools Since the 2019 Rules

Before 2019 there was one pool. Now there are two, and the difference is which type of dividend unlocks each one.

Why this matters in practice: most of your investment income feeds NERDTOH, and NERDTOH is only recovered by paying non eligible dividends, which are the ones taxed more heavily in your hands. So the refund comes with a cost. Planning is about matching the right dividend type to the right pool rather than just paying whatever is convenient, which is where the wider salary versus dividends comparison stops being a rule of thumb and becomes a calculation.  

Part IV Tax on Dividends From Connected and Portfolio Companies

Part IV tax applies when your corporation receives taxable dividends from another corporation. Portfolio dividends, meaning dividends from companies you do not control, attract Part IV tax at 38 and one third percent. That tax is fully refundable and goes into a pool. Connected corporations work differently. Dividends from a corporation you are connected with generally attract Part IV tax only to the extent the payer got a dividend refund, and it is computed on your proportionate share of that refund rather than on the type of dividend you received.

This creates a quirk worth knowing about in holding company structures: ERDTOH can effectively convert into NERDTOH as dividends move up a corporate chain, because the recipient’s Part IV tax is measured against the payer’s refund rather than the character of the dividend. If you have a holdco and an opco, this is a conversation to have before you move money between them, and our guide to when to use a holding company in Canada covers the rest of the trade offs.  

How the Dividend Refund Works, Including the Ordering Rules

The rules are mechanical and there is no election to change them.

• Paying an eligible dividend recovers the lesser of 38 and one third percent of that dividend and your ERDTOH balance.
• Paying a non eligible dividend recovers the lesser of 38 and one third percent of that dividend and your NERDTOH balance, and only once NERDTOH is exhausted can it reach ERDTOH in limited circumstances.

The key discipline: NERDTOH is always consumed first when non eligible dividends are paid. Once the year closes, the outcome is fixed by formula. This is why the dividend mix should be decided before December 31, not while preparing the T2 in the spring, and it belongs on the same list as everything else in an end of year accounting checklist.  

Worked Example: $100,000 of Investment Income From Tax to Refund

Assume a BC CCPC earns $100,000 of interest income and nothing else.

In this example, paying an $80,000 non eligible dividend releases the entire refundable pool, because 38 and one third percent of $80,000 is exactly the balance sitting there. Pay less, and part of the refund stays trapped in the corporation until a future year. Pay more, and there is no additional refund because the pool is empty. That relationship is the single most useful takeaway: roughly $2.61 of non eligible dividends releases $1 of refund, so if you know your pool balance you can work backwards to the dividend that clears it.  

How Passive Income Grinds Down Your Small Business Deduction

Separate from RDTOH, there is a second cost to holding investments in an operating company. Once adjusted aggregate investment income exceeds $50,000 in a year, your small business deduction limit is reduced by $5 for every $1 above that threshold. At $150,000 of passive income the small business limit is gone entirely. Losing it means active business income that was taxed at the small business rate moves to the general rate, and in BC that is a large step up, as the rates in our guide to the small business deduction and corporate tax rates in Canada show.

For an operating company earning meaningful active income, this grind often costs more than the RDTOH mechanics themselves. This is the main argument for separating investments into a holding company, or considering alternatives such as corporate owned insurance or individual pension plans. It is also very fact specific, and moving assets between entities has its own tax consequences, usually handled as a section 85 rollover, so it should be modelled rather than assumed.  

RDTOH, GRIP and CDA: How the Three Accounts Interact

Three notional accounts, three different jobs.

A well planned distribution often uses all three in the same year: capital dividends first because they are free, then eligible dividends to the extent of GRIP, then non eligible dividends sized to release the NERDTOH refund. The order and amounts should be run as one calculation, not decided piecemeal, and the first step in that sequence is covered in our guide to the capital dividend account.  

Where to Find Your RDTOH Balances on the T2

Both pools are tracked on Schedule 3 of your T2 return, and the balances also appear on your notice of assessment and in CRA My Business Account. If your corporation existed before 2019, the transitional rules split the old single pool between ERDTOH and NERDTOH, and that split is worth checking once because errors made then have been carried forward ever since. If the corporate return itself is unfamiliar territory, start with the difference between a T2 and a T1 return.

If your investment income is meaningful and nobody has walked you through these numbers, that is worth fixing. Maxpro Financials reviews CCPC investment income structures across BC, models the dividend mix that actually releases your refund, and tells you whether the small business deduction grind justifies restructuring.  

FAQ: RDTOH and Passive Income in a Corporation

What does RDTOH actually stand for?

Refundable dividend tax on hand. It is the pool of corporate tax on investment income that gets refunded when dividends are paid.  

How much dividend do I need to pay to get the full refund?

Approximately $2.61 of dividends for every $1 of refund, since the refund rate is 38 and one third percent of dividends paid.  

Is capital gains income included in aggregate investment income?

The taxable half is, net of allowable capital losses. The non taxable half feeds your capital dividend account instead.  

What is the $50,000 passive income threshold?

Once adjusted aggregate investment income passes $50,000, your small business deduction is reduced by $5 for every $1 over, disappearing entirely at $150,000.  

Should I move my investments into a holding company?

It can protect the small business deduction and separate risk, but transfers can be taxable and holdcos have their own costs. Model it before acting.  

Can I choose which RDTOH pool to draw from?

No. The ordering is fixed by statute. What you control is the type and size of dividends you pay.  

Do capital dividends generate a dividend refund?

No. Only taxable dividends do. Capital dividends are separate and tax free.  

What happens to RDTOH if I never pay dividends?

It carries forward indefinitely, but it sits there earning nothing. Many corporations accumulate large balances that could have been released years earlier.  

Does a corporate loss year affect RDTOH?

It can. Capital losses reduce aggregate investment income, and non capital losses can affect the refundable portion calculation. The pool is not simply cumulative.  

Where do I see the balance?

Schedule 3 of the T2, your notice of assessment, or CRA My Business Account.  

Ask Us to Review Your Corporation’s Investment Income Strategy