What Is Refundable Dividend Tax on Hand (RDTOH)?

The refundable dividend tax on hand, or RDTOH, is a notional account the Canada Revenue Agency uses to track extra tax that a private corporation pays on investment income and certain dividends received from other corporations. Think of it as a deposit: the government charges a higher rate on passive earnings inside a corporation, sets aside the surplus in the RDTOH account, and refunds up to 38.33% of taxable dividends the corporation later pays to its shareholders. The whole system exists to neutralize any tax advantage from earning investment income through a corporation rather than personally.¹

Which Corporations Have an RDTOH Account

RDTOH applies only to Canadian-controlled private corporations (CCPCs) and, for taxation years starting in 2022 or later, “substantive CCPCs.” A CCPC is a private, Canadian-resident corporation that isn’t controlled by non-residents or public corporations and has no shares listed on a designated stock exchange.²

The substantive CCPC category was added to catch corporations structured to technically fall outside CCPC status while operating like one. Those corporations now face the same rules on investment income, closing a route some businesses had used to sidestep the refundable tax on passive earnings.¹

If your corporation is a public company, a foreign-controlled subsidiary, or otherwise falls outside the CCPC and substantive CCPC categories, RDTOH doesn’t apply.

The Two Pools: Eligible and Non-Eligible RDTOH

For taxation years starting after 2018, RDTOH is split into two separate accounts. Before the split, a single balance meant tax paid on ordinary passive income could be recovered by paying eligible dividends, which are taxed more favorably in the shareholder’s hands. The two-pool system forces the refund to match the type of income that generated the tax.

Eligible RDTOH (ERDTOH)

ERDTOH tracks Part IV tax paid on eligible dividends received from corporations your company is not connected to. It also picks up Part IV tax on dividends from connected corporations, but only to the extent those dividends triggered a refund from the payer’s own ERDTOH balance. In practice, ERDTOH grows when your corporation receives eligible dividends that originated from income taxed at the general corporate rate.¹

Non-Eligible RDTOH (NERDTOH)

NERDTOH captures two things: the refundable portion of Part I tax on your corporation’s own investment income (interest, rents, taxable capital gains), and any Part IV tax on non-eligible dividends received from other corporations. For most CCPCs, this is where the bulk of the RDTOH balance sits, because it tracks the extra tax collected on passive earnings inside the corporate structure.¹

How the Balances Grow

Two mechanisms feed RDTOH: Part IV tax on dividends received, and the refundable portion of Part I tax on passive investment income.

Part IV Tax on Dividends Received

When your corporation receives taxable dividends from another Canadian corporation, those dividends are generally deductible for regular corporate income tax purposes. If the payer is not connected to your corporation, Part IV tax applies at 38.33% of the dividend. That rate is set to approximate the combined tax an individual would pay, so there’s no benefit to routing dividends through a holding company.³

Where the payer is connected to your corporation, Part IV tax is instead limited to a proportionate share of the dividend refund the payer itself received when it paid the dividend. A payer is connected if you control it, or if you own more than 10% of its voting shares and shares worth more than 10% of the fair market value of all its issued shares.⁴

Refundable Portion of Part I Tax

When a CCPC or substantive CCPC earns passive investment income, part of the regular Part I tax on that income is added to NERDTOH. The amount is 30.67% of the corporation’s aggregate investment income for the year, reduced by a formula that accounts for foreign tax credits claimed. It is also capped at 30.67% of taxable income above the amount eligible for the small business deduction, and cannot exceed the total Part I tax payable for the year.¹

The government charges a higher effective rate on passive income than on active business income, and 30.67% of that passive income is earmarked as recoverable. It’s the deposit portion, held until the corporation distributes the earnings.⁵

How the Dividend Refund Gets Triggered

RDTOH balances sit idle until the corporation actually pays taxable dividends. No dividends, no refund. That’s the enforcement mechanism: the government returns its deposit only once the income reaches individual shareholders, where personal tax will apply.

Under section 129 of the Income Tax Act, the dividend refund for the year is the lesser of the relevant RDTOH balance or 38.33% of the taxable dividends paid. The calculation runs separately for each pool:¹

For eligible dividends, the refund is the lesser of 38.33% of total eligible dividends paid or the ERDTOH balance at year-end.
For non-eligible dividends, the refund is the lesser of 38.33% of total non-eligible dividends paid or the NERDTOH balance at year-end. If NERDTOH runs out and a balance remains in ERDTOH, the excess can come from ERDTOH.

The Ordering Rule

When paying non-eligible dividends, the corporation must draw down NERDTOH first before touching ERDTOH. Eligible dividends work in one direction only: they can trigger refunds from ERDTOH but never from NERDTOH. A CCPC can only designate dividends as eligible up to its General Rate Income Pool (GRIP) balance, so you can’t simply switch to eligible dividends to reach ERDTOH if the GRIP isn’t there.

Three-Year Filing Deadline

The corporation must file its T2 return within three years of the end of the taxation year for the dividend refund to be issued. Miss that window and the refund is gone regardless of the RDTOH balance.¹

How Passive Income Also Affects the Small Business Deduction

RDTOH doesn’t operate in isolation. Since 2019, passive investment income also affects a CCPC’s access to the small business deduction. Once a CCPC and its associated corporations earn more than $50,000 of combined adjusted aggregate investment income, the $500,000 business limit begins shrinking. By $150,000 of passive income, the business limit reaches zero.⁶

Passive income above $50,000 does two things at once: it generates NERDTOH through the refundable Part I tax, and it erodes the small business deduction, raising the effective rate on active business income. Both effects belong in the math when deciding whether to hold investment assets inside the corporation.

Reporting RDTOH on the T2

Tracking RDTOH properly requires several schedules alongside the T2 Corporate Income Tax Return. Errors lead to delayed refunds or incorrect pool balances that compound into later years.

Schedule 3 reports dividends received from other corporations and calculates Part IV tax. This is where you identify each dividend as coming from a connected or non-connected corporation and as eligible or non-eligible, which determines whether the resulting tax flows to ERDTOH or NERDTOH.⁷
Schedule 7 calculates aggregate investment income and the income eligible for the small business deduction. The aggregate investment income figure feeds directly into the 30.67% NERDTOH calculation.⁸
Page 7 of the T2 return holds the year-end ERDTOH balance on line 530 and the NERDTOH balance on a separate line, both feeding the dividend refund calculation.

Each year’s opening balance comes from the prior year’s closing balance as assessed by the CRA, which may differ from what you filed if the agency adjusted a prior return. Keep records of every dividend received and paid along with the notices of assessment, so any discrepancy shows up early rather than compounding.

How the CRA Pays the Refund

Once the CRA processes the T2 and confirms the dividend refund, a cheque isn’t guaranteed. The CRA automatically applies refunds against any outstanding federal tax debts before releasing what remains. Corporate income tax, payroll remittances, and GST/HST balances can all absorb a dividend refund.⁹

The offset happens without advance warning. If you’re counting on a dividend refund to fund upcoming obligations, confirm no other balances are outstanding first. Timing the dividend declaration near fiscal year-end and filing the T2 promptly gives you the most control over when the refund arrives and how it’s applied.

1
Justice Laws Website. Income Tax Act – 129
2
Canada Revenue Agency. Type of Corporation
3
Justice Laws Website. Income Tax Act – 186
4
Canada Revenue Agency. Part IV Tax on Taxable Dividends Received by a Private Corporation or a Subject Corporation
5
EY. Corporate Investment Income Tax Rates
6
Canada Revenue Agency. T2 Corporation Income Tax Guide – Chapter 4: Page 4 of the T2 Return
7
Canada Revenue Agency. T2SCH3 Dividends Received, Taxable Dividends Paid, and Part IV Tax Calculation
8
Canada Revenue Agency. T2 Corporation Income Tax Guide – Chapter 6: Pages 6 and 7 of the T2 Return
9
Canada Revenue Agency. How We Automatically Apply Credits and Refunds to Your Debt