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As a business owner or a financial officer of a Canadian corporation, understanding the intricacies of the Refundable Dividend Tax on Hand (RDTOH) regime is crucial for tax planning and corporate distributions. Canadian tax law provides for two accounts in this regard: Non-Eligible Refundable Dividend Tax on Hand (NERDTOH) and Eligible Refundable Dividend Tax on Hand (ERDTOH). Let’s delve into what these mean and their implications for your corporation.
What is RDTOH?
RDTOH represents a notional account that tracks the refundable portion of tax paid by a corporation on investment income. The purpose of RDTOH is to integrate the tax paid by a corporation on investment income with the tax that would be paid by an individual on dividends received. When a corporation distributes dividends, it can claim a refund from its RDTOH account, thus preventing double taxation.
Non-Eligible RDTOH (NERDTOH)
NERDTOH accumulates from tax paid on investment income that is not eligible for the enhanced dividend tax credit when distributed to shareholders (i.e., non-eligible dividends). This typically includes income such as interest, foreign dividends, and certain rental incomes. When a corporation pays non-eligible dividends to its shareholders, it can receive a refund from its NERDTOH account at a rate of $30 for every $100 paid out.
Eligible RDTOH (ERDTOH)
ERDTOH, on the other hand, accumulates from tax paid on investment income that would be eligible for the enhanced dividend tax credit when distributed (i.e., eligible dividends). This includes income from Canadian corporations subject to the general corporate tax rate. The refund rate from the ERDTOH account is $38.33 for every $100 of eligible dividends paid.
Strategic Dividend Planning
Understanding the difference between NERDTOH and ERDTOH is essential for strategic dividend planning. A corporation must consider the type of RDTOH account when deciding what form of dividends to pay (eligible or non-eligible), as it impacts the refund the corporation will receive and the tax implications for the recipient.
The Importance of Consulting a Tax Professional
Given the complexities involved in the RDTOH regime, it’s wise for corporations to consult with a tax professional who can provide guidance tailored to the corporation’s particular circumstances. A CPA or professional with a background in tax law can assist in strategizing the most tax-efficient way to manage and distribute a corporation’s earnings, ensuring compliance with tax laws while maximizing returns to shareholders.
RDTOH is a critical element of tax planning for Canadian corporations. Proper management of NERDTOH and ERDTOH can lead to significant tax savings and more efficient cash flow for both the corporation and its shareholders. As your corporation grows and your financial strategies evolve, keep in mind the importance of these accounts in your overall corporate tax strategy.
For personalized advice and a thorough understanding of how RDTOH impacts your corporation, consider engaging Shajani CPA to help you navigate these waters with expertise and foresight.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.
Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning services.