RDTOH & GRIP for Owner-Managed Corporations

Executive Summary

If your corporation earns passive investment income or pays dividends, you need to understand RDTOH and GRIP:

• RDTOH (Refundable Dividend Tax on Hand): A refundable tax account that tracks taxes paid on passive investment income. When you pay eligible dividends, you can receive a refund of some of these taxes.
• GRIP (General Rate Income Pool): A pool that tracks income taxed at the general corporate rate (not the small business rate). Income in the GRIP allows you to pay "eligible dividends" that qualify for enhanced personal tax credits.
• Why they matter: These mechanisms affect how much tax you pay at both the corporate and personal levels, and understanding them helps you optimize dividend timing and type.
• Who needs to know: Any incorporated business owner earning passive investment income or strategy to pay dividends from their corporation.

This article explains the mechanics, provides examples, and outlines strategies to discuss with your CPA.

Mindset: Tax Integration Across Corporate and Personal Levels

Before diving into the technical details, let's think about this from a total tax perspective.

In Canada, we have an integrated tax system. This means the government tries to ensure that whether you earn income directly (personally) or through a corporation, the total tax paid is roughly the same. RDTOH and GRIP are part of this integration system.

The Big Picture:

1. Corporate tax is not the final tax: When your corporation pays tax on investment income, that's not necessarily the end of the story. If you later pay dividends, there are mechanisms (like RDTOH) that can refund some corporate tax.

2. Dividend type matters: Not all dividends are created equal. "Eligible dividends" (from GRIP) get better personal tax treatment than "non-eligible dividends" (from small business income).

3. Timing can be strategic: Understanding RDTOH and GRIP helps you decide when to pay dividends and what type to pay, potentially reducing total tax across corporate and personal levels.

4. Coordination is key: These mechanisms interact with other tax rules (like the SBD grind, CDA, and personal tax brackets). Working with your CPA to coordinate everything is essential.

The mindset shift: from "corporate tax is separate from personal tax" to "these are connected, and understanding the connections helps optimize total wealth."

Mechanics: How RDTOH Works

What is RDTOH?

RDTOH stands for Refundable Dividend Tax on Hand. It's a notional account that tracks refundable taxes paid on passive investment income.

When a Canadian-controlled private corporation (CCPC) earns passive investment income (like interest, dividends, or capital gains), it pays tax at a high rate (around 50% in most provinces). This passive income also affects your Small Business Deduction if it exceeds $50,000. However, part of this tax is "refundable":meaning you can get it back when you pay eligible dividends.

How RDTOH Accumulates

RDTOH increases when your corporation:

1. Pays Part I tax on passive investment income: When you earn interest, dividends, or realize capital gains, the corporation pays tax. Part of this tax (the "refundable portion") is added to your RDTOH account.

2. Receives eligible dividends: When your corporation receives eligible dividends from other Canadian corporations, the refundable portion of the tax on those dividends is added to RDTOH.

The refundable portion is typically:

• Interest income: 30.67% of the income (in most provinces)
• Dividend income: Varies based on the type of dividend received
• Capital gains: 30.67% of the taxable portion (50% of the gain)

How RDTOH is Refunded

RDTOH is refunded when your corporation pays eligible dividends to shareholders. The refund is calculated as:

RDTOH Refund = Eligible Dividends Paid × Refund Rate

The refund rate is typically 38.33% in most provinces (this is the refundable portion rate).

Important: You can only get the RDTOH refund up to the amount in your RDTOH account. If you pay more in eligible dividends than your RDTOH balance, you only get refunded up to the balance.

Example: RDTOH in Action

Note: This example is illustrative only and not a substitute for professional advice. Actual results will vary based on your specific circumstances.

Year 1: Corporation earns passive income

• Interest income: $100,000
• Corporate tax paid: ~$50,000 (50% rate)
• RDTOH added: $30,670 (30.67% of $100,000)
• RDTOH balance: $30,670

Year 2: Corporation pays eligible dividends

• Eligible dividends paid: $80,000
• RDTOH refund: $80,000 × 38.33% = $30,664
• RDTOH balance after refund: $6 (small remainder)

Net result: The corporation effectively paid tax at a much lower rate on the passive income, because most of the tax was refunded when dividends were paid.

Mechanics: How GRIP Works

What is GRIP?

GRIP stands for General Rate Income Pool. It's a pool that tracks income that was taxed at the general corporate rate (not the small business rate).

Income in the GRIP allows your corporation to pay "eligible dividends" to shareholders. Eligible dividends qualify for the enhanced dividend tax credit at the personal level, which results in lower personal tax.

How GRIP Accumulates

GRIP increases when your corporation earns income that is:

1. Taxed at the general rate: Income that doesn't qualify for the small business deduction (or exceeds the small business limit) is taxed at the general rate (~26-27% in most provinces) and is added to GRIP.

2. Eligible dividend income received: When your corporation receives eligible dividends from other Canadian corporations, the full amount (grossed up) is added to GRIP.

3. Capital dividends from CDA: Capital dividends paid from the Capital Dividend Account (CDA) reduce GRIP.

How GRIP is Used

When your corporation pays dividends, it can designate them as:

• Eligible dividends: If you have sufficient GRIP balance, you can pay eligible dividends. These qualify for the enhanced dividend tax credit at the personal level.
• Non-eligible dividends: If you don't have sufficient GRIP, or choose not to use it, dividends are non-eligible and get the regular (lower) dividend tax credit.

The GRIP balance determines your capacity to pay eligible dividends. You can only pay eligible dividends up to your GRIP balance (plus current-year additions).

Example: GRIP in Action

Note: This example is illustrative only and not a substitute for professional advice. Actual results will vary based on your specific circumstances.

Year 1: Corporation earns general rate income

• Active business income: $600,000
• Small business limit: $500,000
• Income taxed at general rate: $100,000
• GRIP addition: $72,000 (72% of general rate income)
• GRIP balance: $72,000

Year 2: Corporation pays dividends

• GRIP balance: $72,000
• Eligible dividends paid: $70,000
• GRIP balance after payment: $2,000

Personal tax impact: The shareholder receiving the $80,000 eligible dividend gets the enhanced dividend tax credit, resulting in lower personal tax compared to non-eligible dividends.

How RDTOH and GRIP Interact

RDTOH and GRIP work together in the integrated tax system:

1. Passive investment income → Creates RDTOH (refundable tax account)
2. General rate income → Creates GRIP (eligible dividend capacity)
3. Paying eligible dividends → Refunds RDTOH and uses GRIP

The Strategic Connection:

If your corporation has both RDTOH and GRIP, paying eligible dividends can:

• Refund the RDTOH (reducing corporate tax paid)
• Use GRIP (allowing eligible dividend treatment)
• Result in lower personal tax (due to enhanced dividend tax credit)

This creates a "triple benefit" when you have both mechanisms working together.

Example: RDTOH and GRIP Together

Note: This example is illustrative only and not a substitute for professional advice. Actual results will vary based on your specific circumstances.

Corporation Situation:

• RDTOH balance: $30,000
• GRIP balance: $100,000
• Planning to pay: $80,000 in dividends

If paying eligible dividends:

• RDTOH refund: $80,000 × 38.33% = $30,664 (limited to $30,000 balance)
• GRIP used: $80,000 (reduces GRIP to $20,000)
• Personal tax: Lower due to enhanced dividend tax credit

If paying non-eligible dividends:

• RDTOH refund: $0 (no refund available)
• GRIP: Unused (stays at $100,000)
• Personal tax: Higher due to regular dividend tax credit

Result: Paying eligible dividends is clearly advantageous when you have both RDTOH and GRIP.

How to Apply: Owner Playbook

Step 1: Understand Your Current Balances

Work with your CPA to determine:

1. Current RDTOH balance: How much refundable tax do you have accumulated?
2. Current GRIP balance: How much eligible dividend capacity do you have?
3. Projected additions: What will be added to each account this year?
4. Historical patterns: How have these balances changed over time?

Step 2: Review Your Dividend Strategy

Consider your dividend-paying plans:

• Do you plan to pay dividends? If so, when and how much?
• What type of dividends? Eligible or non-eligible?
• Who are the recipients? What are their personal tax situations?

Step 3: Optimize Dividend Timing and Type

Based on your balances and goals, work with your CPA to optimize:

If you have RDTOH:

• Consider paying eligible dividends to trigger the refund
• Time dividends to align with personal tax strategy
• Coordinate with other income sources to optimize personal tax brackets

If you have GRIP:

• Consider paying eligible dividends to use the GRIP balance
• Evaluate whether eligible dividends are better than non-eligible for your personal tax situation
• Plan for GRIP additions and usage over time

If you have both:

• Paying eligible dividends can provide the triple benefit (RDTOH refund + GRIP usage + lower personal tax)
• Coordinate timing with your personal tax strategy
• Consider multi-year strategies to optimize both mechanisms

Step 4: Coordinate with Other Strategies

RDTOH and GRIP interact with other tax mechanisms:

• SBD Grind: Passive income that creates RDTOH also contributes to the grind
• CDA: Capital dividends don't use GRIP and don't trigger RDTOH refunds
• Personal tax brackets: Dividend type affects personal tax, which may influence timing

Work with your professional team to coordinate everything.

Worked Example: The Impact Over Time

Note: This example is illustrative only and not a substitute for professional advice. Actual results will vary based on your specific circumstances, tax rates, investment returns, business income, and other factors. Always consult with your CPA before making decisions.

Let's look at a concrete example to illustrate how RDTOH and GRIP work together.

Assumptions

This example uses the following assumptions:

• Province: Québec
• Small business tax rate: 12%
• General corporate tax rate: 26.5%
• Corporate tax rate on passive investment income: 50.17%
• RDTOH refund rate: 38.33%
• RDTOH addition rate on passive income: 30.67%
• Active business income varies as shown (actual income will vary)
• Investment returns: 5% per year (consistent, actual returns will vary)
• Investment portfolio: $1,000,000 initial value
• Tax rates and rules remain constant (actual rates may change)
• All calculations are simplified for illustration (actual calculations may be more complex)

Scenario

Corporation Details:

• Active business income: $400,000 per year
• Corporate investments: $1,000,000 generating 5% return = $50,000 per year
• Province: Québec
• Small business rate: 12%
• General rate: 26.5%

Year 1: Earning Income

• Active income: $400,000 × 12% = $48,000 tax
• Investment income: $50,000 × 50.17% = $25,085 tax
• RDTOH added: $50,000 × 30.67% = $15,335
• RDTOH balance: $15,335
• GRIP balance: $0 (all active income in small business range)

Year 2: Same Pattern

• RDTOH balance: $15,335 + $15,335 = $30,670
• GRIP balance: Still $0

Year 3: Business Grows, Some Income at General Rate

• Active income: $600,000
• Small business limit: $500,000
• Income at general rate: $100,000
• Investment income: $50,000 (same)
• RDTOH added: $15,335
• RDTOH balance: $46,005
• GRIP added: $72,000
• GRIP balance: $72,000

Year 4: Paying Eligible Dividends

• Eligible dividends paid: $150,000
• RDTOH refund: $150,000 × 38.33% = $57,495 (but limited to $46,005 balance)
• Actual RDTOH refund: $46,005
• RDTOH balance after: $0
• GRIP used: $150,000 (but only $72,000 available)
• Actual GRIP used: $72,000
• Remaining dividends: $78,000 as non-eligible

Tax Impact:

• Corporate tax effectively reduced by $46,005 (RDTOH refund)
• Personal tax: $100,000 eligible dividends get enhanced credit, $50,000 non-eligible get regular credit
• Total tax savings: Significant reduction in total tax across corporate and personal levels

Important Reminder: This example is illustrative only. Your actual results will depend on your specific corporate structure, province, tax rates, income levels, investment returns, and other factors. RDTOH and GRIP calculations are complex and subject to specific rules. Always work with your CPA to understand how these mechanisms apply to your situation and to optimize your dividend strategy.

Decision Checklist

Use this checklist to assess whether RDTOH and GRIP are relevant to your situation:

Corporate Income:

• [ ] Does your corporation earn passive investment income (interest, dividends, capital gains)?
• [ ] Does your corporation earn income taxed at the general rate (above small business limit)?
• [ ] Do you know your current RDTOH and GRIP balances?

Dividend Planning:

• [ ] Do you plan to pay dividends from your corporation?
• [ ] Have you considered the type of dividends (eligible vs. non-eligible)?
• [ ] Have you coordinated dividend timing with personal tax strategy?

Professional Coordination:

• [ ] Have you discussed RDTOH and GRIP with your CPA?
• [ ] Do you understand how these mechanisms affect your total tax?
• [ ] Have you reviewed your dividend strategy in light of RDTOH and GRIP?

Integration:

• [ ] Have you considered how RDTOH/GRIP interact with other tax mechanisms (SBD grind, CDA)?
• [ ] Have you coordinated with your personal tax strategy?
• [ ] Do you have a multi-year strategy for optimizing these mechanisms?

If you checked most items: RDTOH and GRIP are likely relevant to your situation, and you should work with your CPA to understand your balances and optimize your strategy.

Fact-Check & Sources

Official Government Resources

• Canada Revenue Agency (CRA): Refundable Dividend Tax on Hand
• CRA: General Rate Income Pool (GRIP)
• CRA: Eligible Dividends

Tax Legislation

• Income Tax Act, Section 129: Refundable Dividend Tax on Hand
• Income Tax Act, Section 89(1): General Rate Income Pool definition
• Income Tax Act, Section 89(14): Eligible dividend designation

Related Articles

• The SBD "Grind" & Your Corporate Portfolio - Understanding how passive income affects small business deduction
• CDA 101: The Capital Dividend Account Explained - Tax-free dividend strategies
• Tax Optimization Services - How we help optimize corporate tax strategies