Understanding and Managing Investment Income and Refundable Dividend Tax in a CCPC

Canadian Controlled Private Corporations (CCPCs) benefit from lower corporate tax rates in Canada, particularly when compared to personal income tax rates. This advantage is further enhanced for CCPCs by the small business deduction, which significantly reduces tax rates on the first $500,000 of active business income. However, when it comes to investment income, which encompasses earnings such as interest, dividends, royalties, and rental income, the taxation landscape becomes more complex. 

Investment income within a CCPC can affect the small business deduction. To balance the scales and prevent CCPCs from gaining an undue advantage by earning investment income at a lower tax rate, the concept of refundable dividend tax comes into play. This tax is applied to investment income and is only refunded to the corporation when it distributes dividends, whether eligible or non-eligible, to its individual shareholders. 

The mechanism for tracking this refundable portion of the tax is the Refundable Dividend Tax on Hand (RDTOH). However, for tax years post-2018, the RDTOH system has been updated to differentiate between Eligible RDTOH (ERDTOH) and Non-Eligible RDTOH (NRDTOH). The transition rules introduced in 2019 dictate that any existing RDTOH balance will be allocated to the new ERDTOH and NRDTOH accounts, with specific calculations determining the opening balances.