As a business owner or investor in Canada, understanding tax laws and regulations can be overwhelming. One area that can be particularly confusing is Part IV Tax and the Refundable Dividend Tax On Hand (RDTOH). In this blog post, we will discuss everything you need to know about Part IV Tax and RDTOH, including the key concepts, calculations, and benefits.
What is Part IV Tax?
Part IV Tax is a tax that applies to Canadian corporations that receive dividends from other Canadian corporations. The tax rate is currently 38.33% and is designed to prevent corporations from using dividends to reduce their tax liability. The tax is calculated on the grossed-up value of the dividend received, which means that the corporation must include 38.33% of the dividend received in its taxable income.
What is the Refundable Dividend Tax On Hand?
The Refundable Dividend Tax On Hand (RDTOH) is a mechanism that allows corporations to recover some of the Part IV Tax paid on dividends received from Canadian corporations. The RDTOH is calculated as 38.33% of the taxable dividend received and is a credit that can be used to reduce the corporation’s tax liability in future years.
How is Part IV Tax and RDTOH Calculated?
Calculating Part IV Tax and RDTOH can be complex, but the basic formula is as follows:
Part IV Tax = 38.33% x (Dividend Received x 1.38) RDTOH = 38.33% x Dividend Received
To illustrate this, suppose a corporation receives a dividend of $100,000 from another Canadian corporation. The grossed-up value of the dividend is $138,000 (i.e., $100,000 x 1.38). The Part IV Tax on this dividend is $52,794 (i.e., 38.33% x $138,000), and the RDTOH is $38,330 (i.e., 38.33% x $100,000).
What are the Benefits of RDTOH?
The RDTOH is a valuable tax credit that can help reduce a corporation’s tax liability. Here are some benefits of RDTOH:
- Offset Future Tax Liability: The RDTOH can be used to offset future tax liability, which means that corporations can reduce their tax liability in future years by using the credit.
- Increase Dividend Payments: Corporations with a significant RDTOH balance may choose to pay higher dividends to their shareholders. This can be an attractive option for shareholders who are looking for income.
- Refund of RDTOH: If a corporation has an excessive RDTOH balance, it can request a refund of the credit from the Canada Revenue Agency (CRA). This can be a useful option for corporations that do not have future tax liability to offset.
In conclusion, Part IV Tax and RDTOH can be complex, but understanding these concepts is crucial for Canadian corporations. By using the RDTOH credit effectively, corporations can reduce their tax liability and provide additional benefits to their shareholders. It is recommended to consult with a tax professional to ensure proper compliance and optimization of these tax rules.