Refundable Dividend Tax On Hand (RDTOH)

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 (eligible portfolio dividends), and by Part IV tax on dividends from connected corporations to the extent the payer's refund came from its own ERDTOH. Refundable when eligible dividends are paid, and also when non-eligible dividends are paid once NERDTOH is used up.
  • NERDTOH: funded by the refundable portion of Part I tax on the Aggregate Investment Income (AII) of a CCPC, and by all other Part IV tax, including Part IV tax on non-eligible dividends. Refundable only when non-eligible dividends are paid.
• Refundable Part I tax on AII: the usual domestic calculation starts at 30⅔% of AII, subject to taxable-income and Part I tax limits. Foreign investment income and foreign tax credits can change the calculation; use the line 450 calculation on the T2 rather than applying 30⅔% mechanically.
• Part IV tax (ITA s.186): 38⅓% of taxable dividends received from non-connected corporations. On a dividend from a connected corporation, the tax is instead the recipient's share of the dividend refund the payer received for paying it.
• 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 (ITA s.129(1)(a)): eligible dividends paid are refunded from ERDTOH only. Non-eligible dividends paid draw on NERDTOH first, and any excess draws on whatever ERDTOH is left after the eligible dividend refund.

Example

Harbour Investments Ltd. was a CCPC throughout its full 2026 tax year. Assume zero opening refundable-tax pools, no foreign income or credits, sufficient Part I tax and taxable income for the refund calculation, and sufficient GRIP for the eligible dividend. It earned:

• Interest income: $60,000
• Taxable capital gains: $30,000 (50% inclusion on a $60,000 gain)
• Eligible portfolio dividends: $10,000

Aggregate Investment Income (AII): $60,000 interest + $30,000 taxable capital gain = $90,000. Dividends deductible from taxable income are excluded from AII (ITA s.129(4)); they are subject to Part IV instead.

Part I refundable tax on AII: $90,000 × 30⅔% = $27,600, added to NERDTOH.

Part IV tax on eligible portfolio dividends: $10,000 × 38⅓% = $3,833.33, added to ERDTOH.

Dividend paid in 2026:

Harbour pays a $30,000 eligible dividend designated from GRIP.

Refund calculation:

After the current-year refund, the ERDTOH amount available to carry forward is zero and NERDTOH remains $27,600. The T2 reports the year-end pool before subtracting the current-year refund in the next year’s continuity. Harbour can release NERDTOH only by paying non-eligible dividends: $72,000 of them (38⅓% × $72,000 = $27,600) would recover all of it. Had Harbour paid the $30,000 as a non-eligible dividend instead, the refund would have been the full $11,500 from NERDTOH, leaving the $3,833.33 of ERDTOH for a later dividend of either kind.

Capital gains have a second consequence: the non-taxable half of the $60,000 capital gain ($30,000) feeds the Capital Dividend Account (CDA) and can support a capital-dividend election. Canadian-resident shareholders can receive a valid capital dividend tax-free; non-resident withholding and the full CDA balance need separate consideration.

A dividend refund generally requires the T2 to be filed within three years after the tax year-end. A declaration alone is not enough: the dividend must be paid or deemed paid under the applicable rules.

Common mistakes

• Mixing the pools. Eligible dividends tap ERDTOH only; non-eligible dividends tap NERDTOH first, then any ERDTOH left. Paying eligible dividends when the refundable tax sits in NERDTOH recovers none of it.
• 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 under special transition formulas. For a CCPC, the ERDTOH allocation uses 38⅓% of GRIP after subtracting specified prior-year eligible dividends; it is not simply 38⅓% of unadjusted GRIP.
• Overlooking the Substantive CCPC rules. For taxation years starting after April 6, 2022, certain non-CCPCs are taxed on investment income with the refundable Part I mechanics as if they were CCPCs.

Official source

CRA: refundable tax pools and dividend refunds.

Related concepts

• CCPC Status
• General Rate Income Pool (GRIP)
• Low Rate Income Pool (LRIP)
• Capital Dividend Account (CDA)
• Schedule 7. Aggregate Investment Income