Passive earnings inside a company face close to the top personal rate on purpose. A large slice of that levy is a deposit rather than a cost, and this guide explains how it comes back.
Key Takeaways
- Refundable dividend tax on hand is a memo figure the CRA tracks, not cash in the bank.
- Nothing comes back until the company actually pays a taxable dividend.
- The eligible and non-eligible pools have been separate since 2019, and they do not empty in the same order.
- A year with no payout leaves the money parked, sometimes for a decade.
Why Corporate Taxation Creates a Refundable Tax Pool
Canada charges passive earnings inside a private company at close to the top personal rate, so that incorporating gives no deferral advantage on portfolio holdings. In Ontario, interest and rents earned by a CCPC face a combined 50.17%.
Charging that much would over-tax the owner once the money reaches their hands. So part of it is returned when a payout goes out, and the RDTOH account is the ledger that remembers how much is owed back. Our corporate tax advisory team reviews it on every owner-managed engagement.
Where the Two Pools Came From
Until the end of 2018 there was a single combined pool. The 2018 budget split it in two for tax years beginning after that year, closing a mismatch: companies were recovering refundable tax by paying eligible dividends out of income that had never carried the high passive rate. Since the split, the concept is symmetry. Money that went in at the passive rate comes out when non-eligible dividends are paid, and only Part IV amounts on portfolio dividends come out through eligible ones.
The transition worked mechanically. The corporation’s RDTOH account was divided on the first day of the change: the opening eligible pool became the lesser of the old combined balance and 38 1/3 per cent of the general rate income pool (GRIP), and whatever remained became the opening non-eligible pool. Most owner-managed companies, whose GRIP was nil, woke up with everything sitting in NERDTOH. If your two opening figures have never been checked against that formula, it is worth doing, because an error there compounds on every payout since.
How Investment Income Builds the Non-Eligible Tax Pool
Interest, rents, royalties, foreign distributions and the taxable half of capital gains make up aggregate investment income. Under section 129, 30.67% of that amount becomes the refundable portion of Part I tax and joins the non-eligible pool at year end.
Part of that 30.67% comes from the additional refundable levy of 10.67% imposed by section 123.3 on a CCPC’s passive earnings. Since 2022 the same charge reaches substantive CCPCs, which are companies restructured so they are no longer Canadian-controlled on paper.
Example. An Ontario company earns $100,000 of interest. It pays $50,170 in corporate tax and adds $30,670 to its non-eligible pool. Nothing has come back yet.
The Full Integration Loop, Dollar by Dollar
Follow the same $100,000 of interest all the way to the individual and the design becomes visible. The company pays $50,170, recovers $30,664 when it pays out $80,000, and its lasting cost settles at $19,506. The individual who receives that $80,000 non-eligible payout at Ontario’s top bracket pays roughly $38,192 more. Total tax on the loop: about $57,700.
Had the same person simply earned the interest directly, the bill would have been $53,530. The loop costs roughly $4,170 extra, about four points, which is the price of imperfect integration in Ontario. So why hold portfolio assets in a company at all? Because nothing forces the payout in the same tax year. Leave the after-tax amount inside and the individual layer waits; that tax deferral is the real benefit, and the pool ensures the prepaid layer is not lost while you wait.
| Route | Company layer | Individual layer | Total kept |
|---|---|---|---|
| Earn $100,000 interest personally | none | $53,530 | $46,470 |
| Through the company, paid out same year | $19,506 net of refund | $38,192 | $42,302 |
| Through the company, retained | $19,506 net of refund once paid | deferred | deferral until payout |
Part IV Tax on Dividends Your Corporation Receives
Amounts a company receives from Canadian corporations are normally deductible, so they would escape tax entirely if the money simply sat there. Part IV tax closes that gap at 38.33% on portfolio holdings in companies you are not connected with.
Where the payer is connected, you pay Part IV only to the extent the payer itself recovered money, and your pool mirrors the one the payer drew from. Portfolio earnings land in the eligible pool, which is what makes them cheaper to push through a holdco than interest.
Connected Corporations and the Holdco Chain
Part IV draws a line between two kinds of recipients. Portfolio dividends from companies you hold less than 10% of, the non-connected case, attract the tax at 38 1/3 per cent, and it lands in the eligible pool. Dividends between connected corporations work differently: the recipient pays Part IV only in proportion to the refund the payor corporation received on that payout. No refund below means no Part IV above, and the money moves up a holdco chain untouched.
The planning consequence runs both ways. A holdco can bank an operating company’s surplus with no immediate cost while the payor claims no refund. But when the operating company does recover its pool, the holdco inherits a matching Part IV bill in the same proportion, and its own pool grows by that amount. To determine the cost of any distribution up a chain, you measure it at both levels in the same breath, never one at a time. In our corporate tax practice, the mismatch we correct most often is a holdco that paid Part IV nobody tracked, leaving a recovery sitting unclaimed years later.
How the Dividend Refund Works and Which Pool Empties First
Two pools sit on the return. Eligible RDTOH is built almost entirely from Part IV on portfolio holdings. Non-eligible RDTOH is built from passive earnings. Recovery is the lesser of 38.33% of the taxable dividends paid and whichever pool applies.
The ordering rule is what owners get wrong. Eligible dividends can only draw on the eligible pool. A non-eligible dividend empties the non-eligible pool first and reaches the eligible pool only after that one is gone.
Example continued. The company above pays out $80,000 as a non-eligible dividend. It recovers $30,664, being 38.33% of $80,000, just under the $30,670 available. Net corporate cost on the original $100,000 falls from $50,170 to $19,506.
In our practice the most common miss is a company sitting on a large eligible pool while paying non-eligible amounts, because the payer’s general rate income pool was never tracked. The money is recoverable, but only in a year an eligible dividend is actually designated.
The Same Dollars Also Shrink the Small Business Deduction
The passive earnings that feed the pool do double duty against you. The adjusted passive figure from Schedule 7 also counts toward the $50,000 threshold that grinds the business limit: every dollar above it removes $5 of the limit, and at $150,000 the low rate is gone entirely for the associated group. One portfolio, two effects: refundable tax going in, and a smaller amount of income eligible for the low rate next year.
That is why the increase in a company’s portfolio yield can cost more than the statement shows. A $60,000 year of passive earnings builds the pool, and it also strips $50,000 off next year’s business limit, exposing that much profit to the general rate. Price both effects before deciding where the portfolio should live.
RDTOH and the Capital Dividend Account Work as a Pair
When the company sells an appreciated asset, the gain splits in half. The included half is passive income earned that year: it carries the high rate and feeds the non-eligible pool. The untaxed half credits the capital dividend account, and an election lets the company distribute it with no tax to the recipient at all.
The two ledgers answer different questions. CDA measures what can leave tax-free; the refundable pool measures prepaid tax waiting for a dividend to release it. After a large sale, the sequence matters: pay the capital dividend first, since it costs nothing, then size the ordinary payout to recover the pool without pushing the individual into a higher bracket than necessary. Run the two together and a sale can be distributed at a far lower effective rate than either ledger suggests alone.
The Federal Tax Rate Numbers Behind the Refund
| Event | Rate | Pool affected |
|---|---|---|
| Refundable portion of Part I on aggregate investment income | 30.67% | Non-eligible, increased |
| Additional refundable levy under section 123.3 | 10.67% | Forms part of the 30.67% above |
| Part IV on portfolio holdings received | 38.33% | Eligible, increased |
| Recovery triggered by taxable dividends paid | 38.33% of the payout | Reduced |
Those figures are federal and identical in every province, because the mechanism itself is federal. The underlying corporate rate is not, which is why the 50.17% above is an Ontario number. The Schedule 7 calculation is where the passive earnings figure that drives all of this gets determined.
Planning Moves That Free a Trapped Balance
- Time the payout against the fiscal close. A dividend paid before the year closes releases the refund with that year’s return. Paid on January 1 instead, the same dollars wait a full cycle. December 31 versus the next morning is twelve months of cash flow.
- Check GRIP before designating. An eligible designation without GRIP behind it draws Part III.1 penalty tax. Confirm the closing GRIP figure first, then designate.
- Match the pool to the payout. Non-eligible payouts drain NERDTOH first. Where a large eligible pool sits idle, plan at least one properly designated eligible dividend to recover it.
- Mind the anti-avoidance rule. Subsection 129(1.2) denies the refund where a payout to a related company exists mainly to obtain it while the recipient pays no matching Part IV. A refund captured that way is reversed on review.
- Preserve the pools in a reorganization. On an amalgamation or a wind-up into a parent, the balances carry over when the continuity rules are met. Confirm they moved; a balance that falls out of the schedules rarely finds its way back.
Mistakes That Strand a Refundable Tax Balance
- Assuming the balance is cash the company can spend.
- Paying non-eligible amounts while a large eligible pool sits untouched.
- Distributing more than needed, when a smaller payout recovers the same money.
- Losing the two opening figures when accountants change mid-stream.
- Forgetting that a wind-up or an amalgamation can extinguish an unused pool.
- Ignoring the pools inside a holding company that never distributes.
Common Questions About Corporate Taxation of Passive Earnings
What is RDTOH in tax?
It is a notional account tracking the refundable portion of tax a private corporation has paid on passive earnings and on amounts received from other corporations. It is recovered only when the company pays a taxable dividend to its shareholders.
What is the current RDTOH rate?
Recovery equals 38.33% of taxable dividends paid, capped by the relevant pool. Passive earnings add 30.67% of the amount to the non-eligible side, and portfolio holdings received add 38.33% to the eligible side.
How do you get the money back?
Pay a taxable dividend. There is no other trigger, no election, and no expiry date. The dividend refund is claimed on the return for the year the payout is made, so timing matters more than size.
What is the difference between this account and the capital dividend account?
The capital dividend account holds the tax-free half of capital gains and pays out tax-free to Canadian residents. This one holds tax already paid and returns it to the company. One benefits the shareholder, the other benefits the corporation.
Why was RDTOH split into two pools in 2019?
Before 2019 a company could recover Part IV tax on portfolio holdings by paying cheaper non-eligible amounts. Splitting the account matched each recovery to the type of payout that generated it, and every private company had to allocate its opening figure between the two sides.
Does an unused balance expire?
No. The pools carry forward indefinitely until a dividend releases them. They can be lost, though, where the company loses its status, and they must be tracked through every reorganization to survive it.
Why is the refund rate 38 1/3 per cent?
It mirrors the rate a CCPC pays on portfolio dividends under Part IV, so money going into the pool and money coming out move at the same rate. The design keeps a dollar of passive earnings from being cheaper to receive through a company than directly as an individual.
The Bottom Line
This is one of the few places in the Act where the government owes your company money and will wait forever for you to ask.
- Check both pools on the notice of assessment every year, not just the year-end file.
- Match the payout type to the pool you want to empty.
- Size the distribution to the pool, since paying more recovers nothing extra.
- Revisit both figures before any reorganization or wind-up.
Whether to trigger a recovery this year depends on your personal bracket, the company’s cash needs and the pools you are carrying, so the right answer changes annually. Book a corporate tax review if nobody has looked at yours in a few filings.
