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.
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).
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 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.
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.
A CCPC’s opening ERDTOH account will have a one-time addition equal to the lesser of:
As a result:
These new rules will impact taxation years commencing in 2019. To prepare for the change, you should discuss with your PwC adviser whether:
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.
Calgary Private Company Services Leader, Partner, Tax, PwC Canada
Tel: +1 403 509 7538