Part IV Tax and Refundable Dividend Tax on Hand (RDTOH are components of the Canadian tax system that specifically deal with the taxation of dividends received by private corporations. Here’s a breakdown of each concept:
Part IV Tax
Purpose: Part IV Tax is designed to prevent tax deferral and address double taxation issues related to dividends paid between private corporations.
Applicability: It applies to private corporations that receive dividends from other corporations.
Calculation:
Portfolio Dividends: Dividends from non-connected corporations (where the recipient owns less than 10% of the voting shares) are subject to a Part IV Tax rate of 38 1/3% of the total dividend received.
Dividends from Connected Corporations: Dividends from corporations where the recipient owns 10% or more of the voting shares are subject to Part IV Tax calculated as the recipient’s ownership percentage multiplied by the dividend refund received by the payor corporation.
Refundable Dividend Tax on Hand (RDTOH)
Purpose: RDTOH is a mechanism to ensure that the Part IV Tax paid by a corporation is not a permanent tax burden. Instead, it can be refunded when the corporation distributes dividends to its shareholders.
Components:
Part IV Tax: The amount of Part IV Tax paid by the corporation is added to its RDTOH account.
Refund Process: When the corporation pays dividends to its shareholders, it can recover a portion of the RDTOH account. The refund is calculated as a percentage of the dividends paid.
Calculation:
Refund Amount: The refundable portion is typically 38 1/3% of the dividends paid by the corporation. This refund helps offset the Part IV Tax that the corporation previously paid.
How They Work Together
1. Receiving Dividends: When a private corporation receives dividends from another corporation, it may incur Part IV Tax on those dividends. This tax is added to the corporation’s RDTOH account.
Paying Dividends: When the corporation distributes dividends to its shareholders, it can recover part of the RDTOH account. The refund is designed to mitigate the tax impact of the Part IV Tax.
Example
Part IV Tax Calculation: ABC Corp. receives $100,000 in dividends from a non-connected corporation. The Part IV Tax would be 38 1/3% of $100,000 = $38,333.
RDTOH Balance: The $38,333 in Part IV Tax is added to ABC Corp.’s RDTOH account.
Paying Dividends: Later, ABC Corp. pays $50,000 in dividends to its shareholders. The corporation can recover 38 1/3% of $50,000 = $19,167 from its RDTOH account.
Summary:
Part IV Tax: ensures that dividends between private corporations are taxed to prevent deferral and double taxation.
RDTOH: allows corporations to recover some of the Part IV Tax when they pay dividends to shareholders, ensuring that the tax burden is not permanent.
For more information, please visit the Canada Revenue Agency:
Canada Revenue Agency
