A dividend refund returns a portion of the tax a private corporation paid on investment income when it pays taxable dividends to its shareholders.

When a CCPC earns passive investment income, interest, rental income, or taxable capital gains, it pays tax at a higher rate than on active business income. A portion of that tax is refundable: it flows into the Refundable Dividend Tax on Hand (RDTOH) account and is returned to the corporation at a rate of $38.33 for every $100 of taxable dividends paid to shareholders, subject to the applicable RDTOH pool.

The mechanism exists to prevent permanent double taxation of investment income. The corporation pays tax first, the shareholder pays personal tax on the dividend, and the corporation receives a partial refund so the combined rate approximates what an individual investor would have paid directly. Planning the timing and type of dividends to trigger the refund efficiently is a regular part of owner compensation planning for businesses with meaningful passive income.

RDTOH planning is a component of owner compensation strategy that is regularly overlooked. See how Wefinx approaches tax planning.

← Back to glossary