The short answer
RDTOH (refundable dividend tax on hand) is the refundable part of the roughly 50% tax on a corporation's investment income. About 30.67 points of that tax goes into a notional account, and the corporation gets back $38.33 for every $100 of taxable dividends it pays shareholders. Since 2019 the account is split into two pools.
rdtohThe scariest number in corporate investing is the tax rate on passive income: roughly 50.17% in Ontario, from the first dollar. It shows up in every discussion of the SBD grind, and taken at face value it suggests investing inside a corporation is a losing game.
Taken at face value is the mistake. A large slice of that 50% is not a cost but a deposit: refundable tax the corporation gets back later. The account that tracks the deposit is called RDTOH, refundable dividend tax on hand, and understanding it changes how the whole corporate investing picture reads.
The Canadian system aims for integration: a dollar of income should bear roughly the same total tax whether you earn it personally or run it through a corporation first. Investment income threatens that goal, because without a correction, a high-earning professional could park investments inside a corporation taxed at low corporate rates and defer the personal tax indefinitely.
The correction is blunt: tax corporate investment income upfront at approximately the top personal rate (the 50.17%), so there is nothing to gain by hiding investments in a corporation. But since the point of the high rate is only to remove the deferral advantage, a large piece of it is designed to come back once the money continues its journey to a shareholder, where personal tax applies. Prepay now, refund on distribution: that is RDTOH's entire job.
Two streams feed it:
Notice what does not feed it: active business income creates no RDTOH whatsoever. A quiz question from a seminar audience makes the point well: does recovering $1 of RDTOH mean the corporation paid about $1 of dividends? No. It takes roughly $3 of dividends to recover about $1.15 of RDTOH, and only passive income ever put anything in the account to begin with.
The refund is mechanical: when the corporation pays taxable dividends to shareholders, it receives back $38.33 for every $100 of dividends paid, until the relevant pool runs dry.
A worked year, Ontario 2026, corporation earning $100,000 of interest:
| Step | Amount |
|---|---|
| Corporate tax on $100,000 interest (50.17%) | $50,170 |
| Of which refundable (credited to RDTOH) | $30,670 |
| Taxable dividend paid to shareholder | $80,000 |
| Dividend refund to corporation ($38.33 per $100) | $30,664 |
| Net corporate tax after refund | ~$19,500 |
After the refund, the corporation's net tax on that interest is about 19.5%, not 50%. The shareholder then pays personal tax on the $80,000 dividend, and the combined bill lands close to what the interest would have cost if earned personally. Integration, working as designed.
The refund follows the dividend, not the calendar: pay no dividends, get no refund. Which leads to the two ways RDTOH goes wrong in practice.
Stranded RDTOH. A corporation that accumulates for decades and never pays taxable dividends builds a balance that just sits there. The balance carries forward indefinitely and is never lost outright, but it is interest-free credit extended to the CRA, and a corporation with large retained earnings and years of passive income can strand six figures this way. Decumulation planning in retirement is largely the art of pulling dividends at rates that recover RDTOH steadily while keeping personal brackets reasonable.
Paying the wrong kind of dividend. Since 2019 the account is split in two, and the split has teeth.
The 2019 reform divided RDTOH into:
The rule with teeth: eligible dividends you pay out can only recover ERDTOH. Non-eligible dividends recover NERDTOH first, then ERDTOH once NERDTOH is empty. The reform closed a mismatch where corporations recovered refundable tax from high-taxed interest income while paying out low-personal-tax eligible dividends.
For a professional corporation the practical reading is simple: most of your refundable tax lives in NERDTOH (interest and capital gains dominate most portfolios), and NERDTOH is recovered by non-eligible dividends, which is exactly the kind a small-business-rate corporation ordinarily pays. The plumbing usually lines up on its own; where it needs attention is corporations receiving substantial eligible portfolio dividends, where dividend type sequencing becomes a genuine annual planning question for your accountant.
Only taxable dividends open the tap. Salary does not: it is a corporate expense, not a dividend, and a corporation paying out its profits entirely as T4 income recovers nothing. Tax-free capital dividends from the CDA do not either, precisely because they are not taxable. And the refund is computed per year on the T2: dividends paid this year recover this year's available balance, with anything unrecovered carrying forward.
None of this means dividends always beat salary; that trade-off has its own moving parts and its own calculator. It means the corporation's investment activity puts a thumb on the scale: the more passive income the corporation earns, the more valuable each dollar of taxable dividend becomes, because it is simultaneously compensation and a refund trigger.
The refund machinery matters most in decumulation, when the corporation finally starts paying out what it spent a career accumulating.
Take a retired physician whose corporation holds $2 million producing $80,000 a year of interest, rent, and realized taxable gains (deliberately no portfolio dividends here, so every dollar feeds NERDTOH). Each year adds roughly $24,500 to NERDTOH (30.67% of $80,000). Suppose the accumulation years also left a $150,000 RDTOH balance sitting on the books.
Paying herself $120,000 of non-eligible dividends a year does two jobs at once. It funds retirement, and it pulls about $46,000 a year back out of the account ($38.33 per $100 of dividends): the $24,500 the current year just added, plus roughly $21,500 of the old backlog. Run that pattern for about seven years and the stranded balance is fully recovered alongside income she needed anyway. The corporation's effective tax rate on its investment income drops from 50% toward 20% for those years, purely because distributions resumed.
If the portfolio also received Canadian portfolio dividends, those dollars would feed ERDTOH through Part IV tax instead, and the recovery would follow the two-pool ordering above; the shape of the strategy is unchanged. The alternative, structuring retirement income to avoid taxable dividends, would leave the $150,000 locked up indefinitely. The right dividend level each year (enough to clear RDTOH steadily, not so much that personal brackets spike) is one of the highest-value annual conversations an incorporated professional can have; the IPP vs. RRSP comparison covers a related lever on the accumulation side.
Read the 50% headline rate as two numbers: a true cost of about 19.5%, and a refundable deposit of about 30.67% that waits for dividends. A corporation that earns passive income and pays regular taxable dividends runs close to integration and loses little. A corporation that earns passive income and never distributes prepays maximum tax and collects nothing back, on top of whatever the SBD grind is doing to its active income. The grind and the stranded refund are the twin costs of treating a corporation as a vault; both are managed with the same annual conversation.
What that annual conversation covers for an incorporated physician is outlined on the financial planning for physicians page.
No. The refund is triggered only by taxable dividends. Salary is a deductible corporate expense, not a dividend, so it recovers nothing from the RDTOH account. This is one of several ways the salary-versus-dividend decision interacts with the corporation's investment activity.
No. Capital dividends are tax-free to you precisely because they are not taxable dividends, and only taxable dividends generate the refund. A corporation paying out its capital dividend account recovers no RDTOH in doing so.
No, the balance carries forward indefinitely. But it earns nothing while it waits and is only worth something once taxable dividends are paid. A corporation that accumulates for decades and never distributes has effectively prepaid tax and left the refund uncollected.
They are two pools of the same account, split in 2019. ERDTOH holds refundable tax from eligible portfolio dividends; NERDTOH holds refundable tax from other investment income like interest, rent, and capital gains. Eligible dividends you pay can only recover ERDTOH, while non-eligible dividends recover NERDTOH first.
Roughly $2.61 of taxable dividends per $1 of refund, since the refund rate is $38.33 per $100 of dividends paid. To pull back $30,000 of RDTOH, the corporation needs to pay about $78,000 of taxable dividends, which then get taxed in your hands at personal dividend rates.
