Refundable Dividend Tax on Hand Account (RDTOH) is an advanced corporate taxation concept which is often used in conjunction with a HoldCo/OpCo to re-invest earnings back through a Holding Company and into an un-related company (Stocks, Bonds, another company, etc). This tax is not a "tax payable" as some might assume, rather it is a "tax held" by the CRA until such time that shares in a Holding Company (HoldCo) are distributed to it's shareholders when it is then used as a tax credit.
RDTOH is not a means of tax avoidance, rather it is used to defer tax which can then be used for re-investment in other un-related companies with the taxable gains remaining as an offset for later use paying out dividends.
Example of RDTOH:
- After tax has been paid, OpCo has made $500,000 from rental income
- Rather than leaving that money in the OpCo, it is moved to the HoldCo using an inter-company tax free dividend to be re-invested.
- The decision is made to re-invested the $500,000 in profits in the un-related company called New Tech Inc.
- In the first year the New Tech Inc. company pays out a 10% portfolio dividend of $50,000 back to HoldCo which is subject to Part IV tax (33.33%).
- $16,665 is the final amount of Part IV (33.33%) tax which is what is what we refer to as the RDTOH and is held in the RDTOH Account by the CRA until such time that dividends are paid to the HoldCo's shareholders when it can be claimed back.
Why not just pay the profits out as dividends to shareholders?
The answer is a half truth, potential higher taxation paid at a personal rate. If the entire $500,000 was paid out, this would put the individual into the highest tax bracket and forcing them to pay upwards of 50% tax on the dividends.
On the other hand, the CRA has what they call "integration" within the tax system which ensures individuals will end up paying a similar amount of tax regardless if it was earned at source or through a corporation.
Quick take away:
RDTOH is like storing money in a mattress under a bed and becomes an incentive to pay dividends as the RDTOH Account balance increases.