RDTOH in Quebec: Tax refund on dividends (2026)

RDTOH in Quebec: Tax refund on dividends (2026)

L'RDTOH (Tax Refundable on Dividends) is one of the tax mechanisms most misunderstood by incorporated entrepreneurs in Quebec. However, if your corporation generates passive income (investments, rent, portfolio dividends), this mechanism determines how much tax you pay today and how much you’ll recover later. If mismanaged, the RDTOH can turn a corporate investment strategy into a tax trap. When properly understood, it is a refund mechanism that preserves tax integration between the corporation and the shareholder. This article is part of Our Quebec Accounting Glossary and explains how the 2026 system works, with examples and figures.

RDTOH: A quick overview

L'RDTOH (Refundable Tax Paid on Dividends) is a federal mechanism provided for in Section 129 of the Income Tax Act which levies an additional tax on investment income earned by a Canadian-controlled private corporation (CCPC), then partially refunds it to the corporation when it pays taxable dividends to its shareholders. Its purpose: to preserve the Tax Consolidation, meaning ensuring that passive income earned through a corporation is taxed no less (and no more) than income earned directly by the shareholder.

Since 2019, the RDTOH has been divided into two separate accounts:

• RDTOH-D (specified): funded by specified dividends received from other taxable Canadian corporations. Refunded only when the CCPC pays specified dividends.
• RDTOH-ND (undetermined): funded by other passive income (interest, rent, taxable capital gains). Refunded when the CCPC pays Ordinary dividends (undetermined) or eligible dividends.

This distinction now prevents a CCPC from artificially converting ordinary passive income into specified dividend income subject to a low tax rate for shareholders.

How the RDTOH works (tax mechanics 2026)

To understand the RDTOH, you need to follow the money through three steps: the CCPC receives passive income, pays an additional tax, and then recovers that tax when it distributes the income as dividends.

The initial tax rate on passive income

When a CCPC earns investment income, that income is taxed at a combined federal and Quebec rate that is significantly higher than the rate applicable to active income eligible for the SBD. A portion of this tax is credited to the RDTOH account:

• 30.67% of total investment income added to RDTOH-ND account (federal rate, applicable to interest, net rental income, and 50% of taxable capital gains).
• 38.33% of eligible dividends received from other corporations added to RDTOH account.

In Quebec, provincial tax is added on top, but it is not part of the RDTOH refund mechanism: only the federal portion is refundable.

The refund ratio

When a CCPC pays a taxable dividend to a shareholder, it recovers 38.33% of the dividend amount, up to the balance of the applicable RDTOH account. This is the Dividend Tax Refund (RTD).

In practical terms: for every $1,000 in dividends paid, the company recovers up to $383.33 in federal taxes already paid. This mechanism ensures that double taxation (on the business and the shareholder) remains neutral compared to passive income earned directly.

The RDTOH-D / RDTOH-ND distinction since 2019

Before 2019, there was only one RDTOH account. At that time, a CCPC could receive interest (non-specified income), accumulate RDTOH, and then pay a specified dividend (from active income below the SBD threshold) to trigger the refund, a tax advantage deemed abusive.

Since 2019, the program has been paired with:

This distinction has become a central issue in the Tax Planning for a CCPC, particularly for individuals who combine active income with a portfolio of corporate investments.

When the RDTOH applies to your business

The RDTOH does not apply to all companies. Three conditions must be met:

• Being a CCPC (a Canadian-controlled private corporation) throughout the tax year. A CCPC that is more than 50% owned by nonresidents or public corporations loses this status.
• Earning Investment Income : bank interest, net rental income from passively held properties, capital gains on the sale of investments, and portfolio dividends received from other companies.
• Paying Taxable Dividends to shareholders to trigger the refund. Without a dividend, the RDTOH remains a balance on the company’s tax liability and is not refunded.

An often-overlooked key point: Since 2019, when the A CCPC’s passive investment income exceeds $50,000 in a given year, the small business deduction (SBD) limit is reduced by $5 for every dollar over the limit. At $150,000 in passive income, the SBD is completely eliminated. This interaction between RDTOH and Business Threshold (SBD) is one of the main reasons why certain holding company structures are no longer as advantageous as they used to be.

Case studies: 3 scenarios for Quebec SMEs

Case 1: CCPC with $100,000 in investment income

A Quebec CCPC operating in the incorporated consulting sector holds a corporate investment portfolio that generates $100,000 in interest for the year. No active income is earned this year (the entrepreneur is on a sabbatical).

• Additional Federal Tax on passive income (combined federal tax rate of approximately 38.67%): ~$38,670.
• Deposit to the RDTOH account : $100,000 × 30.67% = $30,670.
• The business owner decides to pay himself $50,000 in ordinary dividends to cover his living expenses.
• RTD Refund : $50,000 × 38.33% = $19,165 refunded to the company.
• Remaining RDTOH balance At the end of the year: $30,670 − $19,165 = $11,505 carried forward to subsequent years.

To fully recover the accumulated $30,670, a total of approximately $80,000 in dividends will need to be paid out ($30,670 / 0.3833).

Case 2: Mixed CCPC with revenue below the $50,000 threshold

A CCPC under construction generates $600,000 in active income (eligible for the SBD) and $35,000 in passive investment interest.

• The $35,000 being under the $50,000 threshold, The $500,000 SBD limit remains fully available at the federal and provincial levels.
• Additional tax on the $35,000 in interest ⇒ $10,735 added to the RDTOH account.
• If the business owner pays $100,000 in ordinary dividends (from combined active and passive income): the refund is capped at the RDTOH balance, which is $10,735.

In this scenario, the RDTOH plays a neutral role. The structure remains optimal as long as passive income stays below $50,000.

Case 3: Excess passive income and loss of the SBD

Same CCPC under construction, but the corporate portfolio skyrocketed following a real estate sale. Result: $200,000 in taxable capital gains (meaning $100,000 added to taxable income) plus $60,000 in interest. Total passive income: $160,000.

• Amount exceeding $50,000 : $110,000.
• Reduction of the SBD Threshold : $110,000 × $5 = $550,000, the SBD is completely eliminated.
• Consequence: All active income is now taxed at the general corporate tax rate (approximately 26.5% under the combined Quebec tax system, compared to 12.2% under the SBD).
• On $600,000 in active income, that’s approximately $86,000 in additional taxes immediately.
• The RDTOH-ND account has received a deposit (~$49,072 added), but its earnings do not offset the SBD loss.

This example illustrates why planning for a Passive vs. Active Income Strategies must be filed before the disposal of significant assets, not after.

Common mistakes with the RDTOH

Based on more than 15,000 requests from business owners received since 2023, and with our network of over 1,500 accountants, certain errors come up regularly:

• Forgetting to Monitor Your RDTOH Account After a Reorganization. In the event of a rollover (Section 85), a merger, or a liquidation, the RDTOH-D and RDTOH-ND balances are not automatically transferred. Annual monitoring by your accountant is essential to ensure you do not lose any tax credits.
• Confusing RDTOH-D and RDTOH-ND. Paying an ordinary dividend when the RDTOH is full does not trigger a refund. You need the right type of dividend for the right account.
• Failure to optimize the timing on dividends paid. The RDTOH account can be carried forward indefinitely, but claiming it in a year when the shareholder is in a high tax bracket rather than in a year with low personal income costs several thousand dollars.
• Ignore the effect on the SBD. Many entrepreneurs only learn about the $50,000 rule after they’ve already lost a year of their SBD cap.
• Confusing RDTOH and CDA (capital dividend account). The CDA allows for the payment of a tax-free dividend derived from the tax-exempt portion of capital gains (50%); it is unrelated to the RDTOH, which applies to the taxable portion.

These errors are among The Most Common Mistakes Entrepreneurs Make with Their Accountants, especially when the scope of services covers only the preparation of tax returns without proactive planning.

How to optimize RDTOH with a specialized accountant

Optimizing the RDTOH cannot be done in isolation: it is part of a comprehensive strategy that incorporates shareholder compensation, estate planning, and the ownership-operating structure. A competent tax accountant will ask these questions every year:

• What is the current balance of the RDTOH-D and RDTOH-ND accounts?
• Will anticipated passive income exceed $50,000? If so, is it possible to realize capital losses or defer the disposition of assets?
• What is the shareholder’s projected personal income? Should they pay a dividend this year or wait for a more favourable year?
• A Gesco (management company) would it allow for better segregation of passive and active income?
• The Mechanism TOSI (split income tax), how does it affect dividends paid to family members? See TOSI and Income Splitting (article to be published in Q3 2026).

If you find yourself in a situation where You’ll need to decide between salary and dividendsUnder the RDTOH, there is an additional consideration: a dividend payment triggers a refund only if there is an RDTOH balance, otherwise, it is simply income that is taxed twice without the benefit of integration.

Properly managing the RDTOH requires annual accounting tracking of dividend accounts. To put this cost into perspective, the Bankeo Fee Barometer estimates the median fee at around $3,000 per year (ranging from $500 to $6,000 depending on complexity), and the Bankeo Trust Index helps you choose a vetted accountant who is experienced with corporations.

FAQ - RDTOH in Quebec

Does the RDTOH also exist at the provincial level in Quebec?

No. The RDTOH is a strictly federal as provided for in Section 129 of the Income Tax Act. Quebec taxes the investment income of a CCPC at its own provincial rate without an equivalent refund mechanism. This is one of the reasons why passive corporate income in Quebec remains less advantageous than in Ontario or Alberta.

What happens to my RDTOH account if I sell my business?

When shares are sold, the RDTOH does not automatically “transfer” to the buyer: it remains with the corporation. When assets are sold and the company is subsequently liquidated, the remaining RDTOH balance is refunded as the company pays final dividends to shareholders. Well-designed liquidation planning maximizes this refund.

Is a holding company subject to the RDTOH?

Yes, if it is a CCPC that earns investment income. Many entrepreneurs set up a Gesco to transfer the operating surplus from their operating company to a holding structure, the active income transferred via specified intercompany dividends can be used to fund the RDTOH, and subsequent investment income feeds into the RDTOH.

What is the difference between RDTOH and CDA?

The CDA (Capital Dividend Account) allows a dividend to be paid non-taxable to the shareholder, derived primarily from the tax-exempt portion of capital gains (50%). The RDTOH applies to the taxable portion of those same capital gains, as well as other passive income. The two accounts are complementary and operate in parallel.

How long can a RDTOH balance be carried forward?

Indefinitely, as long as the company remains a CCPC. However, an unused balance does not accrue interest and loses value in real terms (inflation). This is one of the reasons why the timing of dividend payments has a direct impact on the net after-tax return.

Does the RDTOH apply to self-employed individuals?

No. The RDTOH applies only to corporations (CCPCs). An unincorporated self-employed individual reports investment income personally and benefits directly from the Dividend Tax Credit on a personal level.

Does my accountant need to file a specific form for the RDTOH?

The calculation is included in the federal T2 return (Schedule 3 and calculation on line 460). In Quebec, Form CO-17 includes this information but does not provide for a provincial refund. If your accountant never provides you with the balances of your RDTOH-D and RDTOH-ND accounts each year, this is a red flag regarding the quality of their support.

In conclusion

L'RDTOH is not a punitive tax: it is a tax neutrality mechanism that prevents incorporation from becoming a loophole for passive income. When managed properly, it preserves the alignment between the corporation and the shareholder. When mismanaged, it becomes a dormant balance that erodes value each year, and worse still, its interaction with the SBD cap can result in the loss of tens of thousands of dollars in preferential tax treatment.

If your current accountant never discusses your RDTOH and RDTOH-ND balances with you, doesn’t plan the timing of your dividends, or hasn’t anticipated the effect of your passive income on the SBD, it’s because they’re focused on preparing tax returns, not tax planning. The difference amounts to thousands of dollars in savings each year. To learn more, see also Our Ultimate Guide to Tax Optimization for Entrepreneurs and The Benefits of a Corporation in Quebec.

Sources

• Government of Canada - Income Tax Act, Section 129 (Refund to a Private Corporation)
• Canada Revenue Agency - Canadian-Controlled Private Corporation (CCPC)
• Canada Revenue Agency - Taxation of Passive Investment Income from a Private Corporation
• Revenu Québec - Corporate Tax
• Ordre des CPA du Québec - Ressources en fiscalité
• BDC - Understanding Passive Income Tax for a CCPC