The general public may be familiar with accounts such as the income tax account and the tax payable account. However, when it comes to tax, a few of the most important accounts in tax are accounts that you might be unaware of. These accounts include the refundable dividend tax credits (RDTOH), the capital dividend account (CDA) and the general rate income pool (GRIP). These accounts are vital in corporate taxes to provide corporations with the ability to refund existing taxes paid by corporations, receive tax-free money from a corporation and track amounts related to eligible dividends.
Refundable Dividend Tax On Hand (RDTOH)
In simple words, a corporation pays a refundable tax equal to the tax that the shareholders would pay personally. The tax is refunded to the corporation when the dividend is paid. The RDTOH also tracks the refundable portion of tax paid by a Canadian Controlled Private Corporation (CCPC) on its aggregate investment income.
Capital Dividend Account (CDA)
The capital dividend account is where a corporation is able to get tax-free money paid to the shareholder. The dividend arises from gain on sale of property in which only half of it is taxable to the corporation while the other half is distributed to the shareholder tax-free. The CDA is calculated at a point in time and requires an election to be made by the corporation. If calculated incorrectly, dividends in excess of the CDA balance are taxed at a rate of 75%. Therefore, when tax planning, it is essential to ensure the correct balance is in place.
General Rate Income Pool (GRIP)
In paying eligible dividends, a CCPC is able to pay dividends to shareholders at a lower overall rate at the hands of the shareholders. This happens when the corporation has paid a higher rate in which the CCPC was unable to take advantage of the small business deduction. An example of this is paying the high tax rate at the corporate level for investment income earned. Therefore, it is essential to track the GRIP balance correctly to ensure that it is distributed to the shareholder and to take advantage of the lower overall tax personally.
Conclusion
Corporations can save significant tax dollars with appropriate tax planning to the various tax accounts. Inaccurate calculation of these accounts can cause a significant reduction of your income. If you have any questions, reach out to your local Ottawa tax accountant at Al Mulla CAs.
Written by: Zaid Al-Mulla, CPA, CA
