How does RDTOH work, and when does a corporation get the refund?
RDTOH is the refundable tax a private corporation recovers when it pays dividends. Since 2019 it sits in two pools: eligible RDTOH, fed by Part IV tax on eligible dividends, and non eligible RDTOH, fed by 30 2/3% of investment income. The refund is 38 1/3% of dividends paid, claimed on a T2 filed within three years.
The two RDTOH pools and what feeds them
For taxation years that begin after 2018, the old single RDTOH account is split in two by the definitions in s.129(4): eligible refundable dividend tax on hand (ERDTOH) and non eligible refundable dividend tax on hand (NERDTOH) laws-lois.justice.gc.ca. Each pool tracks refundable tax the company has already paid, and each one is released by different dividends.
| Pool | What adds to it | Dividends that release it | T2 line (year end balance) |
|---|---|---|---|
| Eligible RDTOH | Part IV tax on eligible dividends from non connected corporations; Part IV tax on dividends from connected corporations, to the extent the payer got its refund from its own ERDTOH | Eligible and non eligible dividends | 530 |
| Non eligible RDTOH | 30 2/3% of aggregate investment income (CCPCs only, capped); all other Part IV tax, including tax on non eligible portfolio dividends | Non eligible dividends only | 545 |
The 30 2/3% addition is the least of three amounts: 30 2/3% of aggregate investment income (reduced where the foreign tax credit under s.126(1) exceeds 8% of foreign investment income), 30 2/3% of taxable income above the small business amounts, and the company's Part I tax payable for the year laws-lois.justice.gc.ca. Only a corporation that was a CCPC throughout the year, or a substantive CCPC, gets it. Other private corporations build RDTOH from Part IV tax alone
canada.ca.
Aggregate investment income covers property income such as interest, rent and royalties, plus the taxable part of capital gains net of allowable capital losses. Dividends that were deductible in computing taxable income are left out, because Part IV tax already deals with them laws-lois.justice.gc.ca.
How the 38 1/3% dividend refund is calculated
Subsection 129(1) pays the refund at 38 1/3% of taxable dividends paid in the year, capped by the balance in the right pool at year end laws-lois.justice.gc.ca. The type of dividend decides which pool you may draw on.
| Dividend paid in the year | Refund |
|---|---|
| Eligible dividends | Lesser of 38 1/3% of eligible dividends paid and the ERDTOH balance |
| Non eligible dividends, step 1 | Lesser of 38 1/3% of non eligible dividends paid and the NERDTOH balance |
| Non eligible dividends, step 2 | Any shortfall from step 1, limited to the ERDTOH left after the eligible dividend refund |
So a non eligible dividend empties NERDTOH first and only then reaches into ERDTOH. An eligible dividend never touches NERDTOH canada.ca.
Worked example: $100,000 of interest income
Your client's CCPC earns $100,000 of interest in the year and has no active business income, no foreign income and no dividends received. Federal figures only; provincial tax on investment income is added on top and doesn't change the RDTOH arithmetic.
| Step | Calculation | Amount |
|---|---|---|
| Basic federal rate, s.123 | 38% × $100,000 | $38,000.00 |
| Provincial abatement, s.124 | 10% × $100,000 | ($10,000.00) |
| Additional refundable tax, s.123.3 | 10 2/3% × $100,000 | $10,666.67 |
| Federal Part I tax on the interest | 38 2/3% × $100,000 | $38,666.67 |
| Addition to NERDTOH | 30 2/3% × $100,000 | $30,666.67 |
| Non eligible dividend needed to recover it all | $30,666.67 ÷ 38 1/3% | $80,000.00 |
| Dividend refund | 38 1/3% × $80,000 | $30,666.67 |
| Federal tax left after the refund | $38,666.67 minus $30,666.67 | $8,000.00 |
The general rate reduction doesn't apply here, because a CCPC's aggregate investment income is carved out of full rate taxable income in s.123.4(1) laws-lois.justice.gc.ca. The 10 2/3% comes from s.123.3
laws-lois.justice.gc.ca, the 38% from s.123(1)(a)
laws-lois.justice.gc.ca and the 10% abatement from s.124(1)
laws-lois.justice.gc.ca.
Check the cap: the three amounts are $30,666.67 (investment income test), $30,666.67 (taxable income test, since the company has no small business amounts) and $38,666.67 (Part I tax). The least is $30,666.67, so the full amount goes into NERDTOH. If your client pays an $80,000 eligible dividend instead, the refund is nil: ERDTOH is empty and an eligible dividend can't reach NERDTOH.
Timing: paid in the year, claimed within three years
The refund is measured on dividends paid in the taxation year, and s.129(1) only applies where the T2 for that year is filed within three years after the year end laws-lois.justice.gc.ca. Miss that window and the refund for that year is statute barred
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A dividend has to be actually paid, in cash or other property at fair market value, unless it's a deemed dividend. A dividend declared before year end but paid after it counts in the year it's paid. Stock dividends and s.84 deemed dividends qualify; capital dividends, capital gains dividends and dividends caught by s.129(1.2) do not canada.ca.
The CRA applies the refund against Part I tax for the year. Any excess goes against other amounts owing under the Act, and the rest is refunded canada.ca. The three year window is separate from the normal filing due date in T2 filing deadline.
Where RDTOH lands on the T2 and Schedule 3
Schedule 3 carries the dividend side. Parts 1 and 2 compute Part IV tax on dividends received, which goes to line 712 canada.ca. Part 3 lists taxable dividends paid that qualify for the refund, totalled on line 460, and Part 4 strips out dividends that don't qualify
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| T2 line | What it holds |
|---|---|
| 440 | Aggregate investment income, from line 092 of Schedule 7 |
| 445 | Foreign investment income, from line 079 of Schedule 7 |
| 450 | Refundable portion of Part I tax, carried into NERDTOH |
| 520 | ERDTOH at the end of the prior year, less the prior year ERDTOH refund |
| 525 | ERDTOH transferred on an amalgamation or windup |
| 530 | ERDTOH at year end |
| 540 | NERDTOH transferred on an amalgamation or windup |
| 545 | NERDTOH at year end |
| 712 | Part IV tax payable, from Schedule 3 |
| 784 | Dividend refund, from the dividend refund area on page 7 |
You can confirm the opening balances the CRA holds through the "View return balances" service in My Business Account or Represent a Client canada.ca.
Part IV tax and the edge cases you will hit
Part IV tax under s.186(1) applies to a private corporation or subject corporation that receives taxable dividends. From a non connected payer the rate is 38 1/3% of the dividend. From a connected payer it's the recipient's share of the payer's dividend refund for the year, so no refund for the payer means no Part IV tax for the recipient laws-lois.justice.gc.ca. Connected means controlled, or more than 10% of both the votes and the value of the shares.
Noncapital and farm losses can reduce the dividends subject to Part IV tax, and Part IV.1 tax on the same dividend reduces it too canada.ca. The dividend from a connected company lands in the recipient's ERDTOH only to the extent it caused a refund from the payer's ERDTOH; the rest goes to NERDTOH
laws-lois.justice.gc.ca.
On an amalgamation or windup, a predecessor's balances can't move across if s.129(1.2) would have applied to a dividend paid before the transfer canada.ca. Paying eligible dividends also needs a GRIP balance, covered in GRIP account. Investment income that builds NERDTOH can also shrink the business limit, covered in passive income SBD grind.
Sources
Does a capital dividend trigger a dividend refund?
No. A capital dividend isn't a taxable dividend, so the T4012 lists it among the dividends that don't qualify for the refund canada.ca. Pay it to move tax free amounts out, as described in capital dividend account, and pay a taxable dividend to release RDTOH.
Can an eligible dividend recover non eligible RDTOH?
No. An eligible dividend draws only on ERDTOH. Only a non eligible dividend reaches NERDTOH, and it reaches ERDTOH too once NERDTOH is exhausted laws-lois.justice.gc.ca.
How were opening balances set when the two pools started?
For a company that was a CCPC in both years, s.129(5) set the opening ERDTOH at the lesser of the old RDTOH less the prior year dividend refund and 38 1/3% of its GRIP net of eligible dividends paid that year laws-lois.justice.gc.ca.
What happens if the T2 is filed more than three years late?
The dividend refund for that year is lost. Section 129(1) only refunds where the return is filed within three years after the year end, and the T4012 calls the late refund statute barred canada.ca.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.