Refundable Dividend Tax On Hand (RDTOH)
RDTOH is a refundable tax pool tracked by private corporations that returns a portion of federal tax on investment income when taxable dividends are paid to shareholders, split since 2019 into ERDTOH and NERDTOH.
Definition
Refundable Dividend Tax On Hand (RDTOH), governed by ITA s.129, is a notional federal tax account maintained by private corporations. It tracks the refundable portion of corporate tax paid on investment income and on dividends received, and it is refunded to the corporation when it pays taxable dividends to its shareholders. Since tax years beginning after 2018, RDTOH is split into two pools: Eligible RDTOH (ERDTOH) and Non-Eligible RDTOH (NERDTOH).
Key rules
- Two pools (ITA s.129(4)):
- ERDTOH: funded by Part IV tax on eligible dividends received from non-connected corporations, and by Part IV tax on eligible portfolio dividends. Refundable only when eligible dividends are paid.
- NERDTOH: funded by the refundable portion of Part I tax on Aggregate Investment Income (AAII) of a CCPC, and by Part IV tax on non-eligible dividends. Refundable on payment of either eligible or non-eligible dividends.
- Refundable Part I tax on AAII: in 2026 the refundable portion is 30⅔% of AAII, added to NERDTOH.
- Part IV tax (ITA s.186): 38⅓% on taxable dividends received from non-connected corporations and from connected corporations that received a dividend refund.
- Dividend Refund (ITA s.129(1)): the corporation receives a refund equal to the lesser of 38⅓% of the taxable dividend paid and the balance in the applicable RDTOH pool.
- Ordering rules: eligible dividends paid must be matched first against ERDTOH. Non-eligible dividends paid are matched first against NERDTOH, with any excess drawing on ERDTOH.
| Source of addition | Goes to |
|---|---|
| Refundable Part I tax (30⅔%) on CCPC investment income | NERDTOH |
| Part IV tax on eligible dividends from non-connected corps | ERDTOH |
| Part IV tax on non-eligible dividends | NERDTOH |
| Part IV tax on dividends from connected corps | ERDTOH or NERDTOH depending on payer's refund source |
Example
Harbour Investments Ltd., a CCPC, earned the following in 2026:
- Interest income: $60,000
- Taxable capital gains: $30,000 (50% inclusion on a $60,000 gain)
- Eligible portfolio dividends: $10,000
Aggregate Investment Income (AAII): $60,000 interest + $30,000 taxable capital gain = $90,000. Dividends are excluded from AAII for RDTOH Part I purposes (they are subject to Part IV instead).
Part I refundable tax on AAII: $90,000 × 30⅔% = $27,600, added to NERDTOH.
Part IV tax on eligible portfolio dividends: $10,000 × 38⅓% = $3,833, added to ERDTOH.
Dividend paid in 2026:
Harbour pays a $30,000 eligible dividend designated from GRIP.
Refund calculation:
ERDTOH is exhausted. Harbour could continue releasing NERDTOH only by paying a non-eligible dividend (or by paying eligible dividends that exceed any remaining ERDTOH under the ordering rules).
Capital gains have a second consequence: the non-taxable half of the $60,000 capital gain ($30,000) feeds the and can be distributed tax-free.
Common mistakes
- Mixing the pools. Eligible dividends tap ERDTOH first; non-eligible dividends tap NERDTOH first.
- Assuming every dividend triggers a full refund. The refund is capped at both 38⅓% of the taxable dividend and the pool balance.
- Forgetting Part IV tax on dividends received. Inter-corporate dividends often trigger Part IV, which flows into RDTOH.
- Failing to track the split for pre-2019 legacy RDTOH. Transitional rules allocated existing RDTOH between ERDTOH and NERDTOH based on the lesser of the existing balance and 38⅓% of GRIP.
- Overlooking the Substantive CCPC rules. For tax years beginning after April 6, 2022, certain non-CCPCs are taxed on investment income with the refundable Part I mechanics as if they were CCPCs.
Related concepts
Authority
- Income Tax Act s.129
- Income Tax Act s.129(4)
- Income Tax Act s.186
See also
Related entries
CCPC Status
A Canadian-Controlled Private Corporation is a private corporation resident in Canada that is not controlled by non-residents or public corporations, and CCPC status unlocks the small business deduction, refundable tax mechanics, and the capital gains exemption.
General Rate Income Pool (GRIP)
GRIP is a notional pool tracked by CCPCs that represents income taxed at the general corporate rate and supports the payment of eligible dividends to shareholders.
Low Rate Income Pool (LRIP)
LRIP is the notional pool tracked by non-CCPCs that restricts their ability to pay eligible dividends, forcing any LRIP balance to be distributed as non-eligible dividends first.
Capital Dividend Account (CDA)
The Capital Dividend Account is a notional tax pool of a private corporation that allows certain amounts, primarily the non-taxable half of capital gains and life insurance proceeds, to be paid to shareholders as tax-free capital dividends.
Schedule 7. Aggregate Investment Income
Schedule 7 (T2SCH7) calculates aggregate investment income, adjusted aggregate investment income (AAII), and income eligible for the small business deduction, driving the $50K–$150K passive income grind.
This entry is for general reference. It does not constitute professional tax advice. Consult a qualified Canadian accountant for your specific situation.