Refundable Dividend Tax On Hand

For new taxation years that begin on or after January 1, 2019, a new set of rules for refundable dividend tax on hand (RDTOH) balances apply to all Canadian controlled private corporations (CCPC). These rules could increase the tax costs to individuals when distributing corporate funds from their private corporations. These new rules are complex and require a tax professional for effective planning.

Currently, a refundable tax is levied on corporate investment income to ensure that there is no advantage for an individual to earn investment income in a CCPC. This refundable tax is tracked in a corporation’s RDTOH account and is recovered by the corporation only when a taxable dividend is paid or deemed to be paid to the individual shareholders of the corporation.

The new measures will restrict the ability to recover RDTOH through the payment of eligible dividends. Beginning in 2019, the existing RDTOH account will be split into two new accounts:

• A non-eligible RDTOH (NERDTOH) account will track the refundable taxes incurred on investment income earned. A refund of the NERDTOH will only be available upon the payment of non-eligible dividends.
• An eligible RDTOH (ERDTOH) account will track refundable taxes paid on eligible dividends received from corporations that are not connected, as well as eligible dividends received from connected corporations to the extent that these dividends triggered a dividend refund to the payor corporation. A refund of the ERDTOH account will be available upon the payment of eligible and non-eligible dividends.

A CCPC’s opening ERDTOH account balance will be calculated at the lesser of:

• Its existing RDTOH balance
• 38.33% of its GRIP balance

These changes are complex and we recommend you consult with a Bateman MacKay LLP tax professional to maximize your RDTOH tax planning opportunities.