🏦 The Government is Holding Your Money

You left money in your corporation to invest in stocks, thinking, "Corporate tax on active business income is only 12.2%, so I can invest more!"

But when you file your 2025 T2 return, you are shocked. The CRA taxed your interest income at a staggering 50.17% (in Ontario). Furthermore, thanks to the 2024 Inclusion Rate hike, 66.67% of your Capital Gains are now taxable, increasing your effective tax bill significantly.

Don't panic. That high tax is not permanent. It includes a "Refundable Portion." The CRA puts this money into a notional account called RDTOH (Refundable Dividend Tax on Hand). It sits there waiting for you to do one thing: Pay a Dividend.

The Canadian tax system uses a concept called "Integration." The goal is that you should pay roughly the same total tax whether you earn investment income personally or through a corporation.

To stop you from deferring tax indefinitely inside a low-tax corporate shell, the CRA charges a high upfront tax on passive income (Part I Tax + Part IV Tax). But they promise to give a chunk of it back when the money leaves the corporation.

Why Your Corporation Pays 50% Tax on Investments

The Refund Formula (38.33%)

Here is the magic number. For every $1.00 of taxable dividends you pay out to shareholders (yourself), the corporation gets a tax refund of 38.33 cents from its RDTOH balance.

💰 The RDTOH Cycle

  • 1. Your Corp earns $10,000 in Interest Income.
  • 2. Corp pays ~$5,017 in Tax immediately. (Ouch!)
  • 3. About $3,067 of that tax goes into the RDTOH Account.
  • 4. You declare a taxable dividend of $8,000 to yourself.
  • 5. Result: The CRA refunds the Corp ~$3,067. The net corporate tax rate effectively drops to ~20%.

ERDTOH vs. NERDTOH (Know Your Bucket)

Since the 2019 tax rules (still fully applicable in 2026), RDTOH is split into two buckets. You must pay the correct type of dividend to unlock the refund.

  • Eligible RDTOH (ERDTOH): Generated by paying Part IV tax on eligible dividends received from public companies (like Royal Bank or Enbridge stock). You get a refund when you pay Eligible Dividends.
  • Non-Eligible RDTOH (NERDTOH): Generated by high tax on interest, rent, and capital gains. You get a refund when you pay Non-Eligible Dividends.

Strategy: Always check your T2 Schedule 7 balances before declaring a dividend. If you have a balance, pay a dividend to recover the cash. Don't let the CRA hold your money interest-free!

🛡️ Chief Editor’s Verdict

The 50% tax is a temporary deposit—but only if you execute the withdrawal correctly.

  1. Clear the Account Annually: Ask your accountant: "What is my NERDTOH balance?" Ensure you pay enough dividends to clear it out. Leaving money in RDTOH is essentially giving an interest-free loan to Ottawa.
  2. CDA vs. RDTOH: Don't confuse them. RDTOH triggers a corporate refund. The Capital Dividend Account (CDA) allows for tax-free withdrawal to you. With the 2/3 inclusion rate, your CDA balance accumulates slower than before, making tracking it even more critical.

Reclaim what is yours.

Disclaimer: This article is for informational purposes only and does not constitute accounting or tax advice. Canadian tax laws, including the Capital Gains Inclusion Rate (66.67%) and RDTOH mechanisms, are subject to change. Paying dividends to recover RDTOH increases your personal taxable income. Please consult a Chartered Professional Accountant (CPA) to optimize your specific tax situation.