Part IV tax — refundable tax on dividends paid between private corporations
Tax on taxable dividends
Part IV imposes a 38.33% refundable tax on dividends received by a private corporation from a connected or non-connected payer, designed to prevent tax deferral through corporate chains.
Plain-language explanation
Part IV tax (primarily s.186) applies when a private corporation receives a taxable dividend. Without it, a business owner could receive investment income inside a corporation and defer personal tax indefinitely by having the corporation hold the dividend-paying investments.
How Part IV tax works: - A private corporation receiving a taxable dividend from a *non-connected* corporation pays 38.33% Part IV tax on the dividend amount. - A private corporation receiving a taxable dividend from a *connected* corporation (where the payor and recipient are related) pays Part IV tax only to the extent the payor received a dividend refund.
Refundable Dividend Tax on Hand (RDTOH): Part IV tax is credited to the RDTOH account. When the corporation pays a taxable dividend to its shareholders, it receives a "dividend refund" — 38.33 cents for every $1 of dividends paid, up to its RDTOH balance.
The policy: Part IV tax eliminates the advantage of keeping investment income trapped inside a corporation. The integrated system ensures that investment income bears roughly the same tax whether earned personally or inside a corporation that then pays it out.
Example
Holdco Inc. receives $100,000 in dividends from a public company. Part IV tax: 38.33% × $100,000 = $38,330, added to RDTOH. When Holdco pays $100,000 in dividends to its shareholder, it gets a $38,333 dividend refund.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
RDTOH accounts split into two tracks — "eligible RDTOH" (from eligible portfolio dividends and Part IV tax paid on eligible dividends) and "non-eligible RDTOH" (from non-eligible dividends and investment income). Dividend refunds from eligible RDTOH can only be triggered by paying eligible dividends; non-eligible RDTOH is refunded on any taxable dividend. This prevents high-income shareholders from stripping eligible RDTOH through low-taxed dividends.
Before
Single RDTOH pool refunded on any taxable dividend
After
Two RDTOH pools: eligible RDTOH refunded only on eligible dividends; non-eligible RDTOH refunded on any taxable dividend
Common questions
What is RDTOH? +
Refundable Dividend Tax on Hand. It is the accumulation of Part IV tax and a portion of Part I tax on investment income paid by a private corporation. When the corporation pays taxable dividends to shareholders, it gets this tax refunded at a rate of 38.33 cents per dollar of dividends paid.
Does a corporation pay tax on dividends it receives from its subsidiaries? +
It depends. Dividends from connected corporations (broadly, where there is >10% ownership) attract Part IV tax only to the extent the subsidiary received a dividend refund. Dividends from non-connected corporations always attract the full 38.33% Part IV tax.
Key terms
Related sections
Related guides
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 186. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.