Refundable Taxes
Refundable Taxes
Refundable Portion of Part I Tax – Only Applies to CCPC’s
Refundable Portion of Part I Tax is the lesser of:
- 30 2/3% * Aggregate Investment Income (AII)
- 30 2/3 * (Taxable Income – Amount Eligible for the SBD)
- Part I Tax
Note how Aggregate Investment Income got taxed at an additional 10.67% for a total federal tax of 38.67%; this amount is refundable on the payment of taxable dividends by the corporation; and effectively this refund ensures that AII is taxed at 8% federally (38.67%-30.67%).
Refundable Part IV Tax – applies to all Private Corporations (including CCPC’s)
Refundable Part IV Tax is:
- 38 1/3% * Taxable Canadian Dividends Received from non-connected corporations; and
- If dividends are received from a connected corporation; the tax is
- Recipient’s holding % * Dividend Refund received by the payor
Connected corporation = own more than 10% of the voting shares
The Part IV tax was put in place in the tax act to avoid individuals from earning Canadian source dividends through a corporation and deferring taxes. This is possible because corporations do not get taxed on dividends from other Canadian resident corporations.
As a result, to make this a disincentive, this dividend is taxed at 38 1/3% which serves as a proxy to mimic the top personal tax rate on dividends (note this is perfect proxy because in some provinces the top marginal personal tax rate on dividends is higher than 38 1/3%; for instance, in Ontario, the top marginal eligible dividend tax rate is 39.34% and non-eligible dividend is 45.30%).
In essence, the Part IV tax will tax Canadian dividends up front, and provide a refund of these upfront tax when the corporation pays dividends. See RDTOH and Dividend Refund below for more detail.
Refundable Dividend Tax on Hand (RDTOH) – applies to all private corporations (CCPC included)
Refundable Part IV Tax is:
- 1/3 * Taxable Canadian Dividends Received from non-connected corporations; and
- If dividends are received from a connected corporation; the tax is
- Recipient’s holding % * Dividend Refund received by the payor
Connected corporation = own more than 10% of the voting shares
The Part IV tax was put in place in the tax act to avoid individuals from earning Canadian source dividends through a corporation and deferring taxes. This is possible because corporations do not get taxed on dividends from other Canadian resident corporations.
As a result, to make this a disincentive, this dividend is taxed at 33% which is higher than the top federal tax bracket for personal taxes.
In essence, the Part IV tax will tax Canadian dividends up front, and provide a refund of these upfront tax when the corporation pays dividends. See RDTOH and Dividend Refund below for more detail.
Refundable Dividend Tax on Hand (RDTOH)
The RDTOH is a pool that keeps track of all the refundable taxes.
The department of finance revised the RDTOH rules for taxation years of a corporation that begin after 2018.
These new rules were introduced to better align the refund of taxes paid on passive income with the payment of dividends sourced from passive income. Under the existing rules (pre-2019), companies can receive a dividend refund on RDTOH generated from investment income by paying out dividends that were taxed at the general corporate tax rate (i.e., an eligible dividend). Since eligible dividends are taxed at a lower personal tax rate, this resulted in a lower effective tax rate on the distribution. The government wants corporations to receive a dividend refund on RDTOH generated by investment income, only if they pay out non-eligible dividends. To accomplish this, the government introduced two RDTOH accounts: the eligible RDTOH and non-Eligible RDTOH.
1. Eligible RDTOH
Eligible RDTOH =
Opening Balance
+ Refundable taxes paid under Part IV on eligible portfolio dividends received by a corporation (i.e., dividends from non-connected corporations).
+ Taxable dividends received from a connected corporation to the extent that the connected corporation received dividend refund from its Eligible RDTOH balance.
– Dividend refund received by the corporation from its Eligible RDTOH account.
For example, if a private corporation (Company A) received $100,000 eligible dividend from a public company:
- Company A pays Part IV tax of $38,333.33.
- Company A adds $38,333.33 to its Eligible RDTOH account.
For example, if a private corporation (Company A) received $80,000 eligible dividend from a connected corporation (Company B) such that Company B receives a dividend refund of $30,666.67 from its Eligible RDTOH account:
- Company A pays Part IV tax of $30,666.67.
- Company A adds $30,666.67 to its Eligible RDTOH account.
2. Non-Eligible RDTOH
Non-Eligible RDTOH =
Opening Balance
+ Lesser of the following amounts:
- 30 2/3% x aggregate investment income
- 30 2/3% x taxable income less amount eligible for the small business deduction
- the corporation’s Part I tax payable
+ Part IV tax – Part IV tax on eligible dividends from non-connected corporations – Part IV tax on eligible dividends from connected corporations to the extent that such dividends caused a dividend refund from the payor corporation’s Eligible RDTOH account.
– Dividend refund received from the corporation’s Non-Eligible RDTOH account.
In simple terms its basically equal to the RDTOH attributable to passive investment income + Part IV tax that resulted in a refund from non-eligible RDTOH from the connected corporation.
Example 1
- Suppose Company A receives $100,000 of aggregate investment income
- Company A also receives $100,000 of non-eligible dividends from Company B, a connected corporation.
- Company B received a dividend refund from its Eligible RDTOH of $38,333.
- Company A’s Non-Eligible RDTOH = 30 2/3% * ($100,000) + [$38,333 – 38,333] = $30,667.
3. 2019 transitional RDTOH
CASE A: If the corporation is a CCPC, then the opening Eligible RDTOH is equal to the following:
2019 Opening Eligible RDTOH =
Lesser of
- RDTOH balance, or
- General Rate Income Pool (GRIP) x 38 1/3%
2019 Opening Non-Eligible RDTOH =
RDTOH balance – General Rate Income Pool (GRIP) x 38 1/3%
Example 2
Suppose the following facts exist:
- A new company, incorporated in 2018, earned $100,000 of business income and $100,000 of aggregate investment income in 2018.
- The business income was taxed at the general corporate tax rate, resulting in GRIP of $72,000 in 2018.
- The aggregate investment income resulted in RDTOH of $30,667 in 2018.
2019 Opening Eligible RDTOH:
The Company’s 2019 Opening Eligible RDTOH is computed as follows:
The lesser of:
a) RDTOH = $30,667
b) GRIP x 38 1/3% = 72,000 x 38 1/3% = $27,600.
2019 Opening Non-Eligible RDTOH:
$30,667 – $27,600 = $3,066.67
CASE B: If the corporation is not a CCPC:
Opening Eligible RDTOH = RDTOH balance.
Opening Non-Eligible RDTOH = $nil.
Dividend Refund
A company receives a dividend if it pays a dividend and there is a balance in the Eligible RDTOH or Non-Eligible RDTOH account.
(1) If a corporation pays eligible dividends, the dividend refund is equal to the lesser of:
(a) 38 1/3% * eligible dividends paid, and
(b) Eligible RDTOH balance at the end of the year
(2) If a corporation pays non-eligible dividends, the dividend refund is equal to the total of (A) + (B)
(A) the lesser of:
(a) 38 1/3% * non-eligible dividends paid, and
(b) Non-Eligible RDTOH balance at the end of the year
+ (B) if 38 1/3% * non-eligible dividends paid is greater than the Non-Eligible RDTOH, then the lesser of :
(a) 38 1/3% * non-eligible dividends – Non-Eligible RDTOH, and
(b) 38 1/3% * eligible dividends paid – Eligible RDTOH
Example 3
Suppose the following facts are present:
- Eligible dividends paid = $100,000
- Non-eligible dividends paid = $200,000
- Eligible RDTOH = $45,000
- Non-Eligible RDTOH = $38,333.33
Dividend refund triggered on eligible dividends = the lesser of
(a) 38 1/3% * $100,000 = $38,333.33*
(b) $45,000
Dividend refund triggered on non-eligible dividends = the total of (A) + (B) :
(A) the lesser of the following:
(a) 38 1/3% * $200,000 = $ 76,666.67
(b) $38,333.33*
+ (B) the lesser of the following:
(a) $ 76,666.67 – 38,333.33 = $38,333.33
(b) $45,000 – $38,333.33 = $6,666.67*
Therefore, in Example 3:
- the dividend refund in respect of eligible dividends = $38,333.33, and
- the dividend refund in respect of non-eligible dividends = $38,333.33+6,666.77 = $45,000
- Since there were too little Non-Eligible RDTOH, the income tax act allows us to look at the Eligible RDTOH to see if we may trigger dividend refunds from there using non-eligible dividends.
- Since there were excess Eligible RDTOH of $6,666.67, then a non-eligible dividend may trigger dividend refunds from the Non-Eligible RDTOH.
- NOTE, under no circumstances can an eligible dividend ever trigger dividend refunds from the Non-Eligible RDTOH. Non-Eligible dividends may trigger refunds from eligible RDTOH; however, eligible dividends CANNOT trigger dividend refunds from non-eligible RDTOH.