Why should real estate investors care about the refundable dividend tax on hand (RDTOH)? Because Canadian real investors who hold real estate investments in corporations are affected by RDTOH. They can receive a 26.67% refund on their corporate taxes by paying a dividend to the shareholders. Yes. You get a refund for paying yourself money.
The nitty gritty details
The federal government provides a tax refund to corporations that qualify and pay dividends to their shareholders. Why? The refund partially recognizes the absurdity of the corporate tax rates for inactive income, and effectively subsidizing high-rate provinces. In effect, Ottawa recognizes that when individuals pay tax on the dividends they receive, the corporate taxes would otherwise result in an extreme case of double taxation.
In Ontario, for example, the corporate investment tax rate is initially 46.67% for a company earning rental income (and decreasing another 2% over the next couple of years). However, after paying out dividends, the corporation could receive a refund equal to 26.67%. This brings the corporate tax rate down to 20%. If the dividend recipients had no other source of income, it is possible that they may receive approximately $40,000 in dividends each year without paying personal taxes due to the mechanics of the dividend tax credit. Thus, where there are multiple dividend recipients, and affairs are properly arranged to avoid problems related to ‘attribution,’ the 20% tax rate can still be far better than the higher personal tax rates, which are roughly twice this amount.
Where low income dividend recipients are unavailable, the combined personal and corporate tax rates may be neutral or slightly lower compared to simply earning the income personally. Refundable dividend tax on hand is paid back to the company at the rate of $1 for every $3 of dividends paid.
