Tax Insights: The new refundable dividend tax on hand (RDTOH) regime for CCPCs

November 02, 2018

 

Issue 2018-42

In brief

For taxation years beginning after December 31, 2018, all Canadian controlled private corporations (CCPCs) earning investment income must consider a new set of complex rules relating to their refundable dividend tax on hand (RDTOH) balances. These rules could increase the tax costs to individuals when distributing corporate funds from their private corporations. Before January 1, 2019, taxpayers will need to review their companies’ RDTOH balances to determine whether planning is required.

This Tax Insights provides an overview of the RDTOH changes and next steps for taxpayers to consider.

In detail

The current RDTOH rules

To ensure that there is no advantage for an individual to earn investment income (e.g. interest, dividends, rental income, etc.) in a CCPC, instead of directly, a refundable tax is levied on that corporate investment income, in addition to regular corporate income tax. Accordingly, a corporation’s up‑front tax paid is approximately equivalent to the taxes that would be paid by an individual earning that income directly.

This refundable tax is tracked in a corporation’s RDTOH account. The refundable tax is recovered by the corporation only when a taxable dividend (eligible or non-eligible) is paid or deemed to be paid to the individual shareholder(s) of the corporation. This refund of tax is referred to as a dividend refund.

Eligible dividends are distributed from a corporation's general rate income pool (GRIP) and are subject to a lower individual tax rate.

The table below illustrates the tax savings of paying an eligible dividend as opposed to paying a non-eligible dividend in 2019 (based on top combined federal and provincial/territorial dividend tax rates).

Province/Territory AB BC MB NB NL NT NS NU ON PEI QC SK YK
Non-eligible dividends 42.56% 44.63% 46.67% 47.75% 44.59% 36.82% 48.28% 37.79% 47.78%1 45.22% 46.25% 40.37% 42.17%
Eligible dividends 31.71% 31.44% 37.78% 33.51% 42.61% 28.33% 41.58% 33.08% 39.34% 34.22% 40.00% 29.64% 28.93%
% Savings 10.85% 13.19% 8.89% 14.24% 1.98% 8.49% 6.70% 4.71% 8.44% 11.00% 6.25% 10.73% 13.24%
  1. For Ontario, the non-eligible dividend tax rate reflects a non-eligible dividend tax credit rate of 2.9501% for 2019. If Ontario makes additional legislative changes so that its non-eligible dividend tax credit rate is 3.2863% after 2017 (the rate stated in the November 14, 2017 Ontario Economic Outlook and Fiscal Review), Ontario’s top non-eligible dividend tax rate will be 47.40% for 2019.

The new RDTOH regime

The 2018 federal budget announced new measures that restrict the ability to recover RDTOH through the payment of eligible dividends, with limited exceptions. This means that the cost of extracting profits from a CCPC may go up for the typical owner-manager.

Effective for taxation years beginning after December 31, 2018, the existing RDTOH account will be segregated into two new accounts:

  • a non-eligible RDTOH (NRDTOH) account will track the refundable (Part I) taxes incurred on investment income earned (including taxable capital gains), and any refundable (Part IV) taxes on dividends received (net of Part IV taxes tracked in the eligible RDTOH [ERDTOH] pool)

A refund of the NRDTOH will only be available upon the payment of non-eligible dividends. In all provinces these dividends are taxed at a higher rate than eligible dividends.

  • an ERDTOH account will track refundable (Part IV) taxes paid on eligible dividends received from corporations that are not connected,1 as well as eligible dividends received from connected corporations to the extent that these dividends triggered a dividend refund to the payor corporation

A refund of the ERDTOH account will only be available upon the payment of eligible dividends.

The existing RDTOH balance will be added to the NRDTOH account except for the transitional amount.

2019 transitional RDTOH amount

A CCPC’s opening ERDTOH account will have a one-time addition equal to the lesser of:

  • its existing RDTOH balance
  • 38.33% of the CCPC’s GRIP balance

As a result:

  • the corporation’s GRIP balance must be at least 2.6 times the existing RDTOH pool in order for the entire RDTOH balance to qualify as ERDTOH, and
  • if the company has an RDTOH balance, but has no GRIP balance, all of the RDTOH will be added to the NRDTOH account

How PwC can help

These new rules will impact taxation years commencing in 2019. To prepare for the change, you should discuss with your PwC adviser whether:

  • it is possible to move the GRIP and RDTOH balances into the same company to maximize the addition to the ERDTOH account (for example, if a company has RDTOH but no GRIP, determine if the GRIP in a lower-tiered company can be moved to the higher-tiered company)
  • there is a plan to distribute corporate funds to individual shareholders in the next few years because there may be an advantage to speeding up the distribution before 2019 to realize a lower effective tax rate
  • for companies with GRIP, but limited RDTOH, it may make sense to trigger investment gains to create an ERDTOH account that can be used for future distributions

 

 

1. Corporations are “connected” to the dividend payor if they directly hold more than 10% of the votes and value of the payor corporation. As well, the payor is connected if it is indirectly controlled by the same related group. Corporations that are not connected typically include public corporations or venture capital investments in private companies.

Contact us

Jason Safar

Partner, PwC Canada

Tel: +1 905 815 6399

Daniel Fortin

Private Company Services Leader, Quebec, PwC Canada

Tel: +1 514 205 5073

Nadja Ibrahim

Calgary Private Company Services Leader, Partner, Tax, PwC Canada

Tel: +1 403 509 7538

Brad Sakich

Private Company Services Leader, PwC Canada

Tel: +1 604 806 7730

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