Effective tax planning is essential for Canadian businesses and one critical aspect to consider is the Refundable Dividend Tax on Hand (RDTOH) regime. If you are an incorporated business owner, properly navigating RDTOH is important for corporate distributions and tax efficiency.
Canadian tax law classifies RDTOH into two distinct accounts: Non-Eligible Refundable Dividend Tax on Hand (NERDTOH) and Eligible Refundable Dividend Tax on Hand (ERDTOH). Understanding the differences between these accounts is key to reclaiming corporate taxes paid and optimizing financial strategies.
What is RDTOH?
RDTOH is a notional account that tracks the refundable portion of taxes paid by a corporation on investment income. Its purpose is to integrate corporate tax paid on investment income with the personal tax paid on dividends received. When a corporation distributes dividends to shareholders, it may recover tax paid on investment income through RDTOH refunds—preventing double taxation and enhancing cash flow.
Non-Eligible RDTOH (NERDTOH)
NERDTOH is accumulated from tax paid on investment income that is not eligible for the enhanced dividend tax credit upon distribution. Common sources include interest income, foreign dividends, and certain rental income.
When a corporation distributes non-eligible dividends, it can recover tax from its NERDTOH account at a refund rate of $30 for every $100 of dividends paid.
Eligible RDTOH (ERDTOH)
ERDTOH, on the other hand, tracks refundable tax paid on investment income that qualifies for the enhanced dividend tax credit when distributed as eligible dividends. This generally includes investment income derived from Canadian corporations taxed at the general corporate rate.
A corporation can claim a refund from its ERDTOH account at a rate of $38.33 for every $100 of eligible dividends paid.
Strategic Dividend Planning
A well-structured dividend strategy requires careful consideration of NERDTOH and ERDTOH balances. Choosing whether to distribute eligible or non-eligible dividends impacts corporate tax refunds and shareholders’ tax liabilities. By strategically managing these accounts, businesses can optimize tax recovery and improve financial efficiency.
Why Consult a Tax Professional?
The complexities of RDTOH make expert guidance essential. Consulting a CPA or tax professional can help ensure compliance while identifying opportunities for tax savings and improved cash flow. A professional can also provide tailored strategies to effectively distribute earnings and maximize shareholder returns.
Final Thoughts
RDTOH is an integral component of corporate tax planning in Canada. Managing NERDTOH and ERDTOH properly can lead to substantial corporate tax refunds and more efficient financial and cash flow planning. As your business grows, understanding and leveraging these accounts can contribute to long-term financial stability and tax efficient conversion of corporate wealth into tax-paid personal wealth.
For personalized tax strategies that maximize the benefits of your corporation, consider working with a qualified financial expert to navigate the nuances of RDTOH and optimize your corporate tax approach.