Explaining the Refundable Dividend Tax On Hand (RDTOH) & The New Passive Income Rules – A Lesson in Klingon

The 2018 Federal Budget brought in changes for small business corporate taxation. The effect on income splitting was explained in Keeping the Sprinkler Running and a series of strategies to continue income splitting. Today, we will explore the second piece of the proposed passive income tax changes. The restriction of Refundable Dividend Tax On Hand (RDTOH when translated into accountant Klingon).

We will explore how it works and the new changes. The new changes will result in yet another layer of complexity by creating an Eligible-RDTOH (eRDTOH) and a non-eligible-RDTOH (nRDTOH) account.

It’s like walking in on a Klingon mating ritual… Awkward. Possibly dangerous.

What Is an RDTOH Account & Why Do We Have It?

An RDTOH account is a notional account. This means that it really only exists on paper, as part of tracking your business taxes. It is designed to preserve the concept of tax integration. That is the concept that if you get a dividend or income from an investment, it should be taxed the same by the time it is paid to you as an individual – whether you were paid it directly or via your small business.

To deter using a Canadian Controlled Private Company (CCPC), like a professional corporation, as a tax-saving vehicle for passive investment, the passive investment income in a CCPC is taxed at a very high rate. It is supposed to approximate the average top marginal personal rate. As you can see below, it is an imperfect match-up, but close overall.

While that high rate of tax is charged to a CCPC, part of that tax is put into the RDTOH account. The amount put into the RDTOH is 38.33% of eligible dividends and 30.67% of the other investment income types.

When the CCPC eventually pays out a dividend to a shareholder, that triggers the release of that refundable portion of the tax back to the CCPC. Like the sexual tension of a Klingon mating ritual. The idea behind this process is to charge tax upfront so that the CCPC isn’t resulting in tax deferral. To get the refund, for every dollar in the RDTOH, you need to give a dividend of $2.61.

The best way to understand it is to see it. It took me a while to wrap my head around this. So, I have made diagrams tracing how investment income flows below to illustrate.

Let’s start with eligible dividend refundable tax.

An eligible dividend is a dividend distributed by a Canadian company that earns more than the small business threshold. Therefore, it pays taxes at the higher general corporate tax rate. That higher-taxed portion of income over the threshold is noted in the company’s General Rate Income Pool (GRIP).

A CCPC can give eligible dividends up to the amount of their GRIP, while a publicly-traded company can give eligible dividends at any time. The other way that a CCPC can give an eligible dividend, is by receiving an eligible dividend from a publicly-traded or non-connected company.

Eligible dividends, when paid out to an individual, are taxed at a lower rate using the enhanced dividend tax credit. This is to recognize that the income earned by the company has already been taxed at a higher rate.

As seen above, using the top Ontario marginal tax rates, an eligible dividend from a passive investment paid to a CCPC puts 38.33% of the dividend into the eRDTOH. That rate is lower than the personal rate of 39.4%, so there is a small tax deferral advantage of 1.01%.

When the CCPC pays out an eligible dividend, the final eRDTOH money is refunded and the after-tax value is the same whether the passive income was paid via the corp or directly to the individual. Tax integration works pretty well here.

Now, let’s look at other passive investment income and the RDTOH.

Tax integration is less smooth for other investment income. This could be interest, rent, foreign dividends, or the taxable half of a realized capital gain. This type of income is normally paid out of the CCPC to the individual as an ineligible dividend which is taxed at a higher rate than eligible dividends.

As a side note, the non-taxable half of a capital gain in a CCPC goes into its capital dividend account (CDA) which is another notional account. The money in the CDA can be paid out as a tax-free capital dividend.

Klingon Tax Collectors Discussing A Loophole in the Old RDTOH Rules.

Since the RDTOH refund is triggered by the CCPC giving any dividend, whether the money comes from active income or passive income, there was also an opportunity to game the system. This made the taxman very angry as seen on the right and this eye-bulging tax reduction process is highlighted in red in the flow chart below.

When a CCPC gets GRIP by earning active business income over the small business threshold and can pay an eligible dividend (taxed at a lower rate). Yet, it also triggers an RDOTH refund and that results in lower taxes compared to an individual earning that income and much lower taxes compared to a business that does not have GRIP room.

This “tax loophole” is going to be shut down with the splitting of the RDTOH into an eRDTOH and nRDTOH account. With this new legislation, only an ineligible dividend from a CCPC can now trigger a refund from the tax paid into the nRDTOH account.

refundable dividend tax

As you can see above, integration is not perfect.

  • Investment income paid via a CCPC is taxed at a 3.68% higher rate (worse) than if it were paid directly to the individual.
  • Counterbalancing that is the benefit from some tax deferral if the passive income is collected and refund triggered by ineligible dividends disbursed to the owner(s) from active corporate revenue.


  1. Great explanation and I like the flow charts. I never had a good grasp on this, even after my accountant explained it to me, but your post made it easier to understand. If you ever decide to become an accountant on the side, I’ll be your first client! 🙂 I will have to check with my accountant to see whether my CPCC has a balance in the GRIP or not.

    On the side topic of Star Trek, have you seen the episode “USS Callister” on Netflix’s “Black Mirror”? Pretty good episode.

    1. Thanks. It took me several attempts to get the flow chart right, but that is what finally helped me figure it out. I got the basic concept, but I needed actual numbers to see what the fuss was all about. I contacted my accountant about it after finishing the article. I for sure have had some GRIP balance and I don’t recall any eligible dividends, but he may have handled it all for me in the background (he is pretty on the ball). Good to pay attention anyway!

      That show was cool. Reminds me of the old Twilight Zone series.

    1. Not sure if it is worthwhile for everyone. Only a small proportion of docs likely make over 500K. It is 2-3% less absolute tax compared to taking the investment income directly as an individual, but more like 7% compared to taking as an ineligible dividend if the investment is already in a CCPC. I have some cap gains that I plan on realizing this year in my CCPC as part of rebalancing and would hate to pay extra tax by simply waiting past my fiscal year end. To realize cap gains explicitly to take advantage of the loophole before it closes is more of a gamble. You are paying tax now rather than deferring it on the bet that the tax will be much higher later. It will for sure be 6% higher, but could be more if the government raises inclusion rates. Could also be less if someone undoes the changes or otherwise lowers taxes in the future. May not be worthwhile for everyone, but the government sure thought it was worthwhile closing it off.

      1. Thanks for an excellent overview of this topic. The visuals were great.

        You statement that “Only a small proportion of docs likely make over 500K”, may be true, but a larger proportion of Med Prof Corps (MPC) make over $500k, because many dual-physician families operate as a single MPC, thus combining two physicians’ incomes into one MPC active business income.

        For those looking for their GRIP balance, it is available on the CRA “my business account” under the “corporation income tax / view return balances ” link.

        I realized some capital gains this year, paid the tax, and added to my personal taxable investment account. The changes to CCPC tax laws this year have made me realize that rules could change again in the future, and having multiple account types (taxable personal; RRSP; TFSA; corporate account; family trust; etc) will allow me to respond in a more flexible manner to any future tax law changes.

        1. Excellent point on the multi-doc families and the CRA link. We didn’t pay too much attention because we were going to use it strategically over time (now time is ticking!). I also totally agree with the point regarding multiple accounts to diversify against tax/political risk. We are in a similar position and started to ramp up our account diversity while watching Trudeau on the campaign trail hinting that he was “coming for us”. I am actually writing a post about the concept right now! I think of it like sparring with the taxman. If all you can do is punch, it won’t be long before your opponent starts blocking it. You want a variety of kicks, punches, elbows, and finger-pokes at your disposal to adapt and overcome. Thanks for the great addition to the conversation!

  2. Good point, LD.

    Wouldn’t it make sense to keep the capital gain in Corp? Then it can be sold with 50% directly to personal. I think this would effectively be income splitting before 65 if one retires earlier. The remaining capital can be taken out after 65.

    The message I get from the budget is to retire early and use the progressive nature of our tax codes to your advantage.

    1. Yep BC Doc – I also think that using capital gains focused investments in the corp will be the way to go. With the 50% inclusion rate, it is the most efficient way to get money out (as you point out) and in essence doubles the amount of allowable passive income. I am realizing some cap gains now to reposition more towards that strategy from some dividend payers to some swap-based ETFs, take advantage of the loophole before it closes, and to reset the cost basis for some capital gains for the future when the thresholds will matter for me. If I was already balanced/positioned that way, then I would just stay the course and defer the tax on realizing gains now. Everyone’s risk/benefit profile on that would be a bit different.

      It is scary for the productivity of our society, but I agree that the message from this budget and the preceding tax moves is to spend less and work less. If you spend too much and need to work to pay for it or just work and save too much, then you will be financially punished. That leaves the options of retire early or scale back to work just enough to support your financial needs and personal fulfillment. I think it is scary for our society because behaviour is influenced (like it or not) by incentive and this type of messaging kills ambition. If the aim is to pull everyone down to average, then you just lower what average is.

  3. Hi Loonie Doc!

    Thank you for explaining this complex topic. You made it much easier to understand.

    I particularly enjoyed the flowcharts and the quantification of the tax efficiency and tax deferral advantages of each pathway. However, would these numbers change if your personal tax bracket changed? The corporate taxes on investment income are fixed whereas personal taxes are tiered. So, depending on your personal tax bracket I wonder if the efficiency of investing in vs outside of the corporation could be very different than what the flowcharts depict?

    I’ve been thinking that the big advantage of investing in the corp still remains the tax deferral from the corporate vs personal tax rate. However, this only works to your advantage if the corporate tax rate is actually lower than your personal tax rate. Does it make sense to draw salary up to the point where the average tax rate equals the corporate rate of tax (assuming your cashflow needs allow this)?

    Great site and great posts. Thanks!

    1. Hi Sam. Thanks for the comment/question. You are right that the biggest advantage of a corp for investing is the tax deferral. An individual’s situation will vary.

      The primary determinant of how much to take out of a corp should always be driven by how much you need to live on. Otherwise, you lose the tax deferral. It only takes about $25K of personal income to have an average tax rate similar to a small business.

      In terms of dividends vs. salary. Tax integration works pretty well but favors salary slightly in most provinces (except NF and SK at present). However, paying yourself dividends saves on CPP (if you don’t believe it is a good value pension) and allows refunding of the RDTOH. The RDTOH makes the effective tax drag on corp investments very low as long as you keep it flowing. I think I probably explain that concept better here.

      In terms of the optimal mix of salary and/or dividends, it does depend a bit on your tax bracket and province. Definitely, something to get an individualized opinion from an accountant on. My rule of thumb. Enough dividends to keep my RDTOH flowing (usually not much for most people). Enough salary to live off of. Also, salary gives the option of RRSP room (max room at ~146K salary). That RRSP room which can be advantageous.


  4. Hi Loonie Doc,

    Your explanation and chart are great!

    I want to share one disagreement on the effective time, I copied the following words from CRA website:

    The budget proposes that changes to the dividend refund rules will apply for taxation years that begin after 2018. However, the rules will also apply to a taxation year of a corporation that begins in 2018 and ends in 2019 if

    the preceding taxation year was, because of a transaction or event or a series of transactions or events, shorter than it otherwise would have been, and
    one of the reasons for the transaction, event or series was to defer the application of the changes to the dividend refund rules, or the changes to the small business deduction rules, to the corporation.

    I believe the new RDTOH rule will not apply to most companies with taxation year that starts in 2018 and ends in 2019

  5. LD,

    Question about taxation of portfolio dividends in individual hands . . . Your flow chart shows that eligible portfolio dividends can be paid as eligible dividends to the shareholder (as opposed to non-eligible dividends)? Do you have a reliable source for this info?

    I have found several examples that agree but nothing official that clearly states this to be the case. My accountant also thinks that only GRIP would generate eligible dividends (not portfolio dividends).

    Thanks for your efforts in putting together a tremendously useful resource!

    1. Hey Dr. Goon. Thanks for reading and the question. Eligible dividends paid to your corp also generate GRIP on a dollar for dollar basis. Active corp income over the SBD threshold also generates GRIP at a rate of 0.72 for every dollar. I wrote about it in detail with some links here.

      1. Hi LD, the point you made is HUGE.

        Say you live in a province like BC, where an individual can receive almost ~$60k of income (assuming all eligible dividends), and pay almost no federal/prov tax due the enhanced DTC.

        Now if you can survive off of ‘passthrough’ eligible dividends from your CCPC’s investments, and stay under the SBD threshold in your practice, is there ever a reason to take a salary, dividend or anything out of your CCPC anymore?

        I see withdrawing to fund TFSAs as important, but that’s only $6000/year. Unless I’m mistaken, it would be disadvantageous to withdraw from the CCPC to fund RRSP, or non-registered accounts anymore.

        1. Hey Tooth Mechanic,

          The new active-passive income rules where made to basically prevent that approach from getting out of hand by shrinking the SBD threshold. If over the limit, you’d need to start paying out more salary (to bring active income down) or dividends (to use the GRIP generated by getting bumped into the general corp rate). The RDTOH rules also make that approach difficult because you need to give ineligible dividends to release the RDTOH from interest or foreign income. A way to potentially bypass those problems would be to use the corp class ETFs for non-Canadian holdings or bonds. Those would have their own other potential risks.

          Also, using an RRSP if you don’t really need the extra income as salary is a mixed answer. If you would never hit the active-passive income threshold, then it would be a disadvantage. Conversely, if you are going to hit the limits while quite young and want to continue earning and investing at a high rate, then the RRSP room becomes very valuable. There would be an upfront loss of tax deferral in the corp, followed by better tax deferral over a career. There are lots of variables (investment income type, savings rate, spend, income and how they change over time) – that would make it many posts. My corp vs RRSP vs TFSA simulator accounts for them and compares the strategies over a long time frame.

  6. Hi Mark,

    Quick question about the efficiency of capital gains vs other means of flowing money out.

    Say one already draws max RRSP salary of 175k in Quebec and uses it all and has need of 40k surplus for the year (or some other medium-large amount too small for stripping but too large for simply being absorbed by regular cashflow). The corp is generating eRDTOH and nRDTOH on a regular basis from passive income but only the eRDTOH is being drained fully (low-spender, high saver, eligible dividends from eRDTOH are effectively being reinvested in personnal taxable accounts afterwards).

    When does it make sense to use a capital gains harvest instead of electing an ineligible dividend when looking at overall lifetime tax efficiency in such a scenario, assuming 1k CDA cost. Is the benefit of lessening RDTOH tax drag superior to the short-term tax saving realised by the harvest?

    Thanks in advance!

    1. Great question! My article for tomorrow is looking at this in a broader sense (six ways to get a big chunk of cash out of your corp). Releasing RDTOH is probably number 1. The tax has already been collected. Set it free 🙂 You get a 31% refund for the released nRDTOH. The savings of a capital dividend, if you are already trapping RDTOH, is about 29% max. If you are paying out lots of dividends to live on (no trapping) a capital dividend may be better (10-40% savings depending on tax bracket).

      For me, the question of capital gain harvest is purely the size available vs the cost. I look at it once per year as my corp filing approaches and if I have enough to justify it (for me that is about $30K with fees <$500), I do it. If we don't need the money, we invest it personally. It is as or more efficient than corp depending on tax bracket and a nice pot to have for personal spends with minimal tax liability. That also helps decompress the corporation tax efficiently and prevent bloat (trapped RDTOH or passive income problems). Further, it allows you to get money out while a positive CDA balance. For example, we got some out in 2021, but if we had waited to 2022 and needed it, we may not have been able to because our investments were down. That is the approach our accountant advised a few years back and it makes sense to me.

  7. Thank you for this post.

    I read it quickly while working. Seems i have to read it again. If there is any other blog posts related to this theme i will check to read all for better understanding.
    1. Would appreciate knowing the difference of Eligible vs Non Eligible dividents in a professional corporation.
    How to decide for one or the other if the income in the professional corporation comes only from active work not from other sources. (i.e. is not passive income)
    2. to pay or not to pay salary vs salary plus dividends vs paying yourself only dividends.

    1. Hey Ed,

      I also talk about RDTOH in this article about investing using a corporation. I am actually planning two or three short articles to go over it in again for interest, Canadian eligible dividends, and foreign dividends individually to illustrate again and show how the net taxes work out with an embedded calculator.

      For dividends coming from active income. I wrote an article about it here (with pictures). Basically, most dividends would be ineligible if your business is taxed at the small business rate. If taxed at the higher general rate, the corp gets something called GRIP that allows you to give a limited amount of eligible dividends. The basic idea is tax integration and when you add the small business rate plus ineligible dividend rate or the general corp taxes and eligible dividends it is supposed to work out to roughly the same as earning the income directly. The integration isn’t perfect and favors salary in most cases.

      So, the mix of salary vs dividends depends on a bunch of factors. Generally, salary is more efficient and allows you to get RRSP room (also very efficient tax shelter). However, you do need to pay some CPP which has a low but safe investment return. Dividends are a bit less efficient, but if you have investment income it is important to give some usually to help release the RDTOH collected from that passive income. I will be writing much more about that once I get my core curriculum section of the site done. In the meantime, I did build a calculator that uses an algorithm incorporating all the factors. It is complicated, but here.


  8. Hello,

    Im entirely new to the world of Income Tax. I am enrolled in the first year of In-depth course with the CPA. I am having a very hard timing wrapping my head around the working of RDTOH, GRIP (ERDOH and NERDTOH) – eligible and non-eligible dividends.

    I would really appreciate if I can get some resources that explains these account/concepts with a good example.

  9. Hi Mark,

    I truly appreciate all the information you share on your blogs. It has helped me immensely through my corporate investing journey. I find that my accountant either doesn’t quite understand these concepts completely, or he can’t be bothered explaining it and offers to send me articles instead, so your website is a blessing. I am also a big fan of your new Money Scope podcast you started with Ben Felix.

    I seem to have conflicting answers from different accountants regarding the RDTOH accounts and the timing of dividend payouts, so perhaps you can shed some light for me. Assuming in your first year of corporate investing, with nil balances in the eRDTOH, nRDTOH and GRIP accounts, you start earning both passive eligible Canadian dividends as well as foreign dividends. Can the eligible dividends earned throughout the year be paid out personally via eligible dividends prior to year end to avoid paying the 38.33% corporate tax on it? My accountant says I have to wait until after year end to have the amount added to my GRIP account before I can pay out the eligible dividend personally. When I asked another accountant, I was told it can be paid out immediately. If this is correct, then this would be an advantage for me as my personal tax rate on eligible dividends is significantly lower than the tax rate I would pay via the corporation. I would be able to invest a larger amount personally the same year the eligible dividend is earned instead of waiting for the refund the following year.

    If dividends can be paid out personally the same year they are earned, does this apply to non eligible dividends as well after earning passive interest income, foreign dividends, and the taxable portion of capital gains? This part could be more confusing.

    Perhaps this strategy would only work with regard to the eRDTOH account and not the nRDTOH account, which is why I am getting different opinions from different accountants.

    Any insight you can provide me with regards to this would be greatly appreciated.


    1. Hi Bob,
      This is a really interesting question. My corporate tax year ends Jul 31st and my accountant is always able to reconcile it that all of my RDTOH is refunded (ie never really collected) at tax time. So, paying eligible dividends as you get them should release the eRDTOH collected at corp tax filing time when is both collected and refund (ie the net is determined). Still, I am not certain – it could just be that I have never noticed an issue because it is just a 6 month gap for me and the dividend increase of that gap is pretty minor. So, I will ask around.

    2. Hey Bob,
      I looked into this some more. There may be some buried technical issues in the tax code, but the way that it plays out in practice is that a corporation could give an eligible dividend during the year and then the GRIP calculated later at fiscal year end and filing. So, if your corporation got eligible dividends before year end, an eligible dividend paid out would be possible. There is a caution there though. If you were to give out eligible dividends beyond what your GRIP account allows at the corporate tax filing, then there is a penalty tax within the corporation to offset the lower personal tax. So, people are not generally advised to do this unless they are certain about the amount of GRIP their corporation will have at tax filing time.

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