By OptiVal Editorial Desk

RDTOH Explained: How the Refundable Dividend Tax Works in a Canadian Holding Company

Here is a number most holding company owners have never heard: 30 2/3%. That is the slice of the tax your corporation pays on investment income that is not really gone. It sits in an account at the CRA, tracked on your corporate tax return, waiting for the day you pay yourself a dividend. The account is called RDTOH, short for refundable dividend tax on hand. Understand it, and investment income inside your company goes from brutally taxed to merely expensively taxed. Ignore it, and you may be leaving an interest-free loan with Ottawa for years.

What RDTOH Is and Why It Exists

Start with Ottawa’s worry. If a corporation paid less tax on investment income than you would personally, every high earner in the country would park their portfolio inside a company. To stop that, the tax system charges a Canadian-controlled private corporation a punishing upfront rate on investment income: 50.17% in Ontario for 2026 (38.67% federal plus 11.5% provincial). That is the “no advantage” rate.

But it is not all permanent. Of that 50.17%, a 30 2/3% slice is refundable. It goes into the RDTOH account, which your accountant tracks on Schedule 31 of the T2 return. The permanent, non-refundable cost works out to about 19.5%. You recover the refundable slice by paying taxable dividends to shareholders, at which point CRA hands it back through what is called a dividend refund. The whole design is called integration: roughly the same total tax whether you earn the income directly or through your company.

Two Pools: Eligible and Non-Eligible RDTOH

Since 2019, RDTOH has been split into two separate accounts, and the split matters more than most owners realize.

Non-eligible RDTOH collects the refundable 30 2/3% on the corporation’s own investment income: interest, rent, taxable capital gains, foreign investment income. It also collects Part IV tax paid on non-eligible dividends the corporation receives from other companies. For a typical holding company, this is where almost the entire balance lives.

Eligible RDTOH collects refundable tax tied to eligible dividends the corporation receives from other Canadian corporations (Part IV tax runs at 38 1/3% on those dividends). Most small holdcos barely touch this pool.

The dividend refund itself equals 38 1/3% of the taxable dividends the corporation pays, limited to whatever sits in the relevant pool. Which pool is “relevant” is where the planning lives.

How the Money Comes Back: The Dividend Refund

Pay a taxable dividend, claim a dividend refund. The ordering rule is the part that trips people up:

• Pay non-eligible dividends, and the refund comes out of the non-eligible pool first. If that pool runs dry, the refund can spill over into the eligible pool.
• Pay eligible dividends, and the refund can come only from the eligible pool. Eligible dividends cannot touch a dollar of non-eligible RDTOH.

Read that twice, because it is the whole game. If your RDTOH balance is sitting in the non-eligible pool, which it almost certainly is, and you only ever pay yourself eligible dividends, that refundable tax is stranded. It does not expire, but it does not earn interest either. It just sits there, an interest-free loan to the government, until someone pays the right kind of dividend.

Here is the convenient part for most holding companies: a corporation can only designate dividends as eligible to the extent of its GRIP (general-rate income pool), which is built from income taxed at the full corporate rate. A pure investment holdco has no GRIP, so its dividends are non-eligible by default. Non-eligible dividends are exactly what recovers the non-eligible pool. The system, for once, points in a helpful direction.

A Worked Example With 2026 Ontario Numbers

Say your Ontario holding company earns $100,000 of interest income this year and nothing else.

• Corporate tax at 50.17%: $50,170.
• Refundable slice into non-eligible RDTOH (30 2/3% of $100,000): $30,666.67.
• Permanent tax cost: $19,503.33, or 19.5%.

Later, the holdco pays you an $80,000 non-eligible dividend (assuming the cash is on hand, which it usually is in a holdco with retained earnings). The dividend refund is 38 1/3% of $80,000, which is $30,666.67, exactly the pool balance. The holdco recovers every refundable dollar in a single move.

You, of course, pay personal tax on the $80,000 dividend. At the top Ontario bracket that runs about 47.7% on non-eligible dividends in 2026. Add the corporate and personal layers together and you land roughly where you would have if you had earned the interest personally. That is integration doing its job. The lesson is not that the corporation saves you tax. The lesson is that the scary 50.17% headline rate overstates the true cost, as long as the dividends eventually flow and they are the right kind.

Three Ways Owners Strand Their RDTOH

1. Paying only eligible dividends. Covered above. Match the dividend type to the pool, or the refund never comes.

2. Paying a capital dividend and expecting a refund. Capital dividends, paid tax-free out of the capital dividend account, do not trigger a dividend refund at all. Useful tool, wrong job.

3. Never claiming it. The dividend refund is claimed on the corporate tax return. It does not happen automatically. This is worth a direct question to whoever prepares your T2: what is our RDTOH balance, and what is the plan to recover it?

What This Means for Your Holding Company

RDTOH does not exist in isolation. It sits alongside the other two taxes on corporate investing you should know about: the small business limit grind, where passive income over $50,000 starts chewing through your $500,000 small business deduction (we covered that here), and the retain-versus-pay decision itself (our guide to paying yourself versus retaining earnings to invest). If you are still deciding whether a holding company structure makes sense at all, start with the basics.

The practical takeaway is simple. If you are building investments inside a corporation, the tax story has two chapters: the upfront hit, and the recovery. Most owners only ever read chapter one. Ask your accountant for your RDTOH balance, confirm which pool it sits in, and make sure your dividend plan is designed to bring it home. For background on the mechanics, the CRA’s dividend refund rules page is the official reference.

This article is general information for educational purposes. It is not financial advice and does not recommend any specific investment. Consider speaking with a licensed professional about your own situation.

Want more plain-English guides? Browse the Learn hub.