Intercorporate Dividend Tax Calculator Part IV Tax and RDTOH
Moving surplus from the operating company up to a holding company is usually free of tax. Usually. Work out whether Part IV tax applies to your transfer, what lands in the holdco after it, how the two refundable pools move, and whether safe income covers the dividend.
net cash in the holdco
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How the Dividend Is Taxed on Receipt
| Item | Basis | Amount |
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The Two Refundable Pools
| Movement | Basis | Eligible RDTOH | Non-Eligible RDTOH |
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Where the Cash Ends Up
| Step | Basis | Amount |
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Points to Settle Before Declaring the Dividend
What to Do Next
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Disclaimer: This calculator applies Part IV tax under section 186 at 38.33% on portfolio dividends and, for connected payers, at the recipient’s share of the payer’s dividend refund. It applies refundable Part I tax on aggregate investment income at 30.67%, the dividend refund at 38.33% of taxable dividends paid, and the ordering rule in section 129 under which a non-eligible dividend draws on the non-eligible pool before the eligible pool while an eligible dividend can draw only on the eligible pool. Part IV tax on an eligible dividend received from a connected payer follows the pool the payer’s refund came from, which this calculator simplifies by reference to the type of dividend received. Safe income on hand must be computed properly and attributed to the specific shares. Foreign tax credit adjustments, Part IV loss offsets under subsection 186(1), the related-party exceptions in subsection 55(3) and provinces other than Ontario are not modelled. This page is general information, not tax advice, and no dividend should be declared on it.
Why Intercorporate Dividends Are Usually Free of Tax
Section 112 lets a Canadian corporation deduct a taxable dividend received from another Canadian corporation in computing its taxable income. Without that rule, the same profit would be taxed at every level of a corporate chain. With it, surplus can move from an operating company up to a holding company without a second layer of corporate tax.
Part IV tax exists to stop that deduction being used to defer personal tax indefinitely. It is a refundable levy, not a permanent cost, and whether it applies at all depends on one question: is the payer connected with you.
Connected Against Portfolio
| Situation | Part IV Tax | Effect |
|---|---|---|
| Connected payer, no dividend refund triggered | Nil | The transfer is genuinely free of tax |
| Connected payer that recovers refundable tax | Your share of the payer’s refund | Tax follows the refund, dollar for dollar |
| Portfolio dividend, not connected | 38.33% of the dividend | A real cash cost until you pay a dividend out |
This is the whole mechanism in one sentence. Part IV tax on a connected dividend is exactly equal to the refund the payer received for paying it, so the group is no better and no worse off. Where the payer had nothing to recover, nothing is charged.
What Connected Actually Means
Subsection 186(4) sets two routes. The payer is connected with the recipient if the recipient controls the payer, or if the recipient owns more than 10% of the issued voting shares and more than 10% of the fair market value of all issued shares. On the second route both tests have to be met, not just one.
A holding company that owns all the shares of the operating company is plainly connected. A corporation holding a small stake in a public company is not, and that is why portfolio dividends carry the flat 38.33% charge.
The Two Refundable Pools Since 2019
Before 2019 there was a single refundable dividend tax on hand account. It was split in two so that refundable tax generated by eligible dividends could only be recovered by paying eligible dividends out.
| Pool | Fed By | Recovered By |
|---|---|---|
| Eligible RDTOH | Part IV tax on eligible dividends received | Paying eligible dividends, and non-eligible dividends only once the other pool is empty |
| Non-eligible RDTOH | Refundable Part I tax on investment income at 30.67%, plus Part IV tax on non-eligible dividends | Paying non-eligible dividends |
The Refund and the Ordering Rule
The dividend refund is 38.33% of taxable dividends paid, limited by the pools. The ordering matters and it is where refunds get stranded.
- A non-eligible dividend paid draws first on the non-eligible pool, and only reaches the eligible pool once that is exhausted.
- An eligible dividend paid can only ever draw on the eligible pool.
- The consequence: a corporation with a large eligible pool that only pays non-eligible dividends will eventually reach it, but a corporation with a large non-eligible pool that only pays eligible dividends never touches it at all.
The Full Cycle
| Stage | What Happens |
|---|---|
| Operating company earns investment income | Pays refundable Part I tax at 30.67%, added to its non-eligible pool |
| Operating company pays a dividend up | Recovers $38.33 per $100 of dividend, limited by its pools |
| Holding company receives the dividend | Deducts it under section 112, pays Part IV tax equal to the payer’s refund |
| Holding company adds to its own pool | The Part IV tax becomes refundable to it |
| Holding company pays a dividend to you | Recovers $38.33 per $100, and you pay personal tax on the dividend |
Nothing is lost through the chain. What changes is timing, and on a large transfer the cash sitting with the CRA between the second and fifth stage can be substantial.
Section 55(2) and Safe Income
This is the real risk in moving cash up, and it is far larger than Part IV tax. Subsection 55(2) can recharacterise an intercorporate dividend as a capital gain where the dividend exceeds the safe income on hand attributable to the shares and one of the purposes of the dividend was to reduce a capital gain, or to significantly reduce the fair market value of the shares, or to significantly increase the cost of property.
Safe income on hand is broadly the after-tax retained earnings that accrued while you held the shares and that can reasonably be said to contribute to the accrued gain. It is a computation, not a balance sheet figure, and it has to be attributed to the specific shares being paid on.
A regular annual sweep is safe. A large dividend just before a sale is not. Moving accumulated after-tax earnings up each year keeps the dividend comfortably inside safe income and does not carry a purpose of reducing a capital gain. A single large dividend declared shortly before a share sale, to strip value out of the operating company, is exactly the fact pattern subsection 55(2) was written for.
The Part IV Exception Inside Section 55(2)
Subsection 55(2) does not apply to a dividend that is subject to Part IV tax, to the extent that tax is not refunded as part of the same series of transactions. That sounds like a shelter, and occasionally it is, but it is a narrow one.
The moment the holding company pays a dividend out and recovers the Part IV tax as part of the same series, the exception falls away and the original dividend is exposed again. Relying on it without tracking the series is a common and expensive mistake.
Practical Rules for Moving Cash Up
- Check the payer’s refundable balances first. A payer with nothing to recover creates no Part IV tax at all.
- Compute safe income before declaring, and keep the working papers. Not afterwards, when it is being questioned.
- Sweep annually rather than in one large movement. It keeps every dividend inside safe income and creates a documented pattern.
- Match the dividend type to the pool you are trying to recover, or the refund sits stranded.
- Do not strip value immediately before a sale. That is the fact pattern the provision targets.
- Document the resolution and date it when the decision was actually made.
What This Calculator Does Not Model
- The related-party exceptions in subsection 55(3), which can take a reorganisation outside the provision entirely
- Part IV tax offset by losses under subsection 186(1)
- Foreign tax credit adjustments to the refundable Part I calculation
- Capital dividends, which are not taxable dividends and carry no Part IV tax
- The general rate income pool and whether an eligible designation is available at all
- Provinces other than Ontario
Safe income is the piece worth paying for. Part IV tax is arithmetic and it comes back. A dividend recharacterised as a capital gain under subsection 55(2) does not. Our holding company planning service covers the safe income computation, the annual sweep and the resolutions.
Frequently Asked Questions
Common questions from owners moving surplus into a holding company.
Related Calculators and Guides
More tools for owners with a holding company.
Compute Safe Income Before You Declare, Not After
Part IV tax is arithmetic and it comes back. A dividend recharacterised as a capital gain does not. Send us the operating company’s tax history and share structure and we will compute the safe income attributable to your shares and set up an annual sweep.