The non-eligible refundable dividend tax on hand, or NERDTOH, is a notional account the Canada Revenue Agency uses to track refundable tax that a Canadian private corporation pays on its passive investment income and on certain dividends it receives. The corporation gets that tax back only when it pays non-eligible dividends to its shareholders, which keeps the combined corporate-plus-personal tax bill close to what the shareholder would have paid earning the income directly.
The account exists so investment income can’t sit inside a corporation at a permanent tax advantage. Tax goes in when the income is earned; tax comes out when the money is distributed. Nothing in the middle earns the corporation a refund on its own.
What Feeds the NERDTOH
Two streams build the balance: the refundable portion of Part I tax on investment income, and Part IV tax on certain dividends received.
Refundable Portion of Part I Tax
When a Canadian-controlled private corporation (CCPC) or a substantive CCPC earns passive investment income such as interest, rent, royalties, or taxable capital gains, 30⅔% of its aggregate investment income is added to NERDTOH, reduced by a formula that accounts for foreign tax credits claimed on foreign investment income.1Department of Justice Canada. Income Tax Act – Section 129 The 30⅔% combines the 10⅔% additional refundable tax on investment income with a share of the regular Part I tax, so the effective corporate rate on passive income sits close to the top personal marginal rate until a dividend is paid.
Foreign investment income is defined broadly for this purpose: income from sources outside Canada, including the eligible portion of foreign-source capital gains and net foreign property income, after subtracting exempt income and deductible dividends. The amount is entered on line 445 of the T2 return (from line 079 of Schedule 7).2Government of Canada. T2 Corporation Income Tax Guide – Chapter 6: Pages 6 and 7 of the T2 return
Part IV Tax on Dividends Received
When a private corporation receives taxable dividends from a corporation it is not connected to, it pays Part IV tax at 38⅓% of those dividends.3Justice Laws Website. Income Tax Act – Section 186 – Tax on assessable dividends Where that tax lands depends on the dividend type. Part IV tax on non-eligible dividends from non-connected corporations goes to NERDTOH. Part IV tax on eligible dividends from non-connected corporations goes to ERDTOH instead.
Dividends from connected corporations follow the tracing rule. Part IV tax only applies to a connected-corporation dividend if the payer received a dividend refund on it. If the payer’s refund came from its NERDTOH, the recipient’s Part IV tax goes to its own NERDTOH. If the refund came from ERDTOH, the recipient’s Part IV tax goes to ERDTOH.2Government of Canada. T2 Corporation Income Tax Guide – Chapter 6: Pages 6 and 7 of the T2 return The character of the original tax follows the money through the chain.
Who Generates NERDTOH on Investment Income
Since April 7, 2022, the NERDTOH rules also cover substantive CCPCs, meaning corporations that would qualify as CCPCs but for certain non-resident ownership or public corporation involvement. They generate NERDTOH on the refundable portion of Part I tax the same way a CCPC does. Any other private corporation, one that is neither a CCPC nor a substantive CCPC, only builds NERDTOH (and ERDTOH) from Part IV tax on dividends received, not from Part I tax on investment income.2Government of Canada. T2 Corporation Income Tax Guide – Chapter 6: Pages 6 and 7 of the T2 return
How the Year-End Balance Is Calculated
NERDTOH is a rolling ledger. The closing balance for a taxation year equals:
- the prior year’s NERDTOH, less any dividend refund issued from NERDTOH for that prior year;
- plus the refundable portion of Part I tax on the current year’s aggregate investment income (line 450 of the T2);
- plus any NERDTOH transferred in from a predecessor on amalgamation or from a wound-up subsidiary;
- plus the current year’s Part IV tax that is allocated to NERDTOH rather than ERDTOH.
That total caps the non-eligible dividend refund available for the year and is entered on line 545 of page 6 of the T2 return.2Government of Canada. T2 Corporation Income Tax Guide – Chapter 6: Pages 6 and 7 of the T2 return Errors in the opening balance or in the Part IV allocation carry forward every year and can leave a corporation either short of a refund it was entitled to or claiming one it wasn’t.
The underlying numbers flow from Schedule 7, which calculates the refundable portion of Part I tax and breaks down the investment income components.
Getting the Refund
To recover NERDTOH, the corporation pays non-eligible dividends to its shareholders and files its T2 within three years of the taxation year-end. The refund for the year equals the lesser of:
- 38⅓% of all non-eligible taxable dividends paid during the year, and
- the corporation’s NERDTOH balance at year-end.1Department of Justice Canada. Income Tax Act – Section 129
So $10,000 of non-eligible dividends paid supports a refund of up to $3,833, provided NERDTOH is at least that large. The 38⅓% refund rate is calibrated against the 30⅔% addition so that pushing enough income out to shareholders recovers dollar-for-dollar what was set aside on the way in.
The refund is claimed by completing parts 3 and 4 of Schedule 3. If no dividends are paid, the NERDTOH balance simply carries forward. The government holds the tax indefinitely and pays no interest on it, so leaving a large balance sitting there has a real cost of delay.
Ordering Rules When You Also Have ERDTOH
A corporation with balances in both accounts can’t choose which to draw from. Section 129 forces the order. Non-eligible dividends must draw from NERDTOH first, and only after NERDTOH is exhausted can excess non-eligible dividends pull a refund from ERDTOH.4Justice Laws Website. Income Tax Act – Section 129
The reverse doesn’t work. Eligible dividends only trigger refunds from ERDTOH, never from NERDTOH. A corporation that pays only eligible dividends will leave its NERDTOH untouched no matter how large it grows.
That’s the planning point. A CCPC with a substantial NERDTOH needs to pay enough non-eligible dividends to drain it before eligible dividend refunds become accessible. Non-eligible dividends carry a lower gross-up and dividend tax credit for individual shareholders, so the personal tax cost is higher, but the corporate refund only flows if those non-eligible dividends actually go out. A CCPC can pay eligible dividends only up to its general rate income pool (GRIP) balance without triggering Part III.1 tax.5Canada Revenue Agency. General rate income pool (GRIP) Corporations earning mostly passive income tend to have low GRIP anyway, so most of their dividends will be non-eligible and NERDTOH drains naturally. The pressure lands hardest on corporations mixing active business income with passive investment income, where owners have to decide each year which type of dividend to pay.
Passive Income Also Grinds the Small Business Deduction
NERDTOH doesn’t operate in isolation. Passive investment income also reduces the small business deduction (SBD) that a CCPC can claim. The federal SBD gives qualifying corporations a net federal rate of 9% on the first $500,000 of active business income.6Canada Revenue Agency. Corporation tax rates Once the corporation’s adjusted aggregate investment income in the previous year exceeds $50,000, the $500,000 limit is reduced by $5 for every $1 of passive income above the threshold. At $150,000 of passive income, the SBD is gone.
Associated corporations share the $500,000 limit and combine their passive income for the grind. Two associated CCPCs each earning $30,000 of investment income would collectively hit $60,000 and trigger the reduction even though neither crossed the threshold alone. Adjusted aggregate investment income is broader than aggregate investment income: it adds taxable dividends from non-connected corporations and certain capital loss adjustments, so some items that don’t directly build NERDTOH still cut into the SBD.
The result is a double hit. Passive income above $50,000 builds NERDTOH (refundable only on payment of non-eligible dividends) and simultaneously pushes active business income out of the SBD bracket into the general corporate rate. A corporation with $200,000 of active business income and $100,000 of passive income sees its SBD limit reduced by $250,000 ($5 × $50,000 of excess passive income), leaving only $250,000 of active income at the 9% federal rate. The rest is taxed at the general federal rate of 15%. Watching the NERDTOH balance is really about watching passive income, because the same dollars that fill the account are the ones that shrink the SBD.