Holding Company Year-End: Investment Income and RDTOH (2026)

Reviewed by Bader A. Chowdry, CPA, CA, LPA on November 2, 2026

Short answer: a holding company in Ontario pays about 50.17% tax on interest, rent and the taxable half of capital gains in the year it earns them, but roughly 30.67 of those percentage points sit in a refundable pool that comes back when the company pays taxable dividends. The non-taxable half of capital gains goes into the capital dividend account and can be paid out with no personal tax if the election is filed on time. The biggest year-end risk is often not the holdco’s own tax: passive income above $50,000 in 2026 can cut your operating company’s federal small business limit for 2027. This guide covers each piece, with a worked example and a pre-year-end checklist.

How much tax does an Ontario holding company pay on investment income in 2026?

A Canadian-controlled private corporation (CCPC) pays federal Part I tax at a basic rate of 38%, or 28% after the 10% federal abatement. Active business income then gets either the small business deduction (bringing the federal rate to 9%) or the general tax reduction (bringing it to 15%). Investment income gets neither. The CRA’s T2 guide states that the general tax reduction does not apply to “investment income subject to the refundable tax provisions.”

On top of the 28%, a CCPC pays an additional refundable tax of 10 2/3% on its investment income, other than deductible dividends. That brings the federal rate to 38.67%. Ontario then applies its general corporate rate of 11.5% to all income that does not qualify for the lower small business rate. Together, that is about 50.17%.

Investment income here means “aggregate investment income”: interest, rent and other property income, plus taxable capital gains net of allowable capital losses. Canadian dividends received from other corporations are not taxed this way; they are usually deductible and caught by Part IV tax instead, covered below. Capital gains are taxed at the 50% inclusion rate, which is the enacted rate; the proposed increase to two-thirds was cancelled in March 2025 and never became law. For more on how gains are taxed, see our capital gains guide for small businesses.

How does RDTOH get part of that tax back?

The refundable dividend tax on hand (RDTOH) system exists so that investment income earned through a company ends up taxed at roughly the same overall rate as if you had earned it personally. It runs on two pools:

• NERDTOH (non-eligible pool). Fed by the refundable portion of Part I tax, which is 30 2/3% of aggregate investment income, and by Part IV tax on most dividends received from connected corporations.
• ERDTOH (eligible pool). Fed mainly by Part IV tax on eligible dividends received from portfolio (non-connected) investments, such as shares of public companies.

The company gets a dividend refund when it pays taxable dividends to its shareholders. The refund is 38 1/3% of the dividends paid, limited by the pool balance at year end. Eligible dividends can only draw on ERDTOH. Non-eligible dividends draw on NERDTOH first, then on any ERDTOH left. The CRA notes that the refund is only available if the T2 return is filed within three years of the year end; after that it becomes statute-barred.

Two year-end points follow from this. First, the refund is tied to dividends paid in the taxation year, so a holdco sitting on a large NERDTOH balance should decide before its year end whether to pay a dividend. Second, the personal cost of that dividend depends on timing: Ontario’s non-eligible dividend tax credit falls from 2.9863% to 1.9863% of the grossed-up dividend on January 1, 2027 (enacted in Bill 97). See Ontario’s non-eligible dividend tax credit in 2027.

What does a worked example look like?

Assume an Ontario holdco that is a CCPC throughout the year earns $100,000 of interest in 2026 and pays an $80,000 non-eligible dividend to its owner before year end.

Step	Calculation	Amount
Interest income	Aggregate investment income	$100,000
Federal Part I tax	38% less 10% abatement = 28%	$28,000
Additional refundable tax	10 2/3%	$10,667
Ontario tax	11.5%	$11,500
Total corporate tax	About 50.17%	$50,167
Added to NERDTOH	30 2/3% of $100,000	$30,667
Dividend refund on $80,000 dividend	Lesser of 38 1/3% x $80,000 and NERDTOH	$30,667
Net corporate tax after refund	$50,167 less $30,667	$19,500

Illustration only. Rounded to the dollar. The owner then pays personal tax on the $80,000 non-eligible dividend.

If the same holdco instead realized a $100,000 capital gain, only $50,000 would be taxable. Tax at about 50.17% would be roughly $25,083, NERDTOH would rise by about $15,333 (30 2/3% of $50,000), and the other $50,000 would be added to the capital dividend account.

What is the capital dividend account and how do you pay it out?

The capital dividend account (CDA), defined in subsection 89(1) of the Income Tax Act, tracks amounts a private corporation received that would not have been taxed in a shareholder’s hands. The main source for most holdcos is the non-taxable half of capital gains, reduced by the non-deductible half of capital losses. Capital dividends received from other corporations also flow in.

To pay a capital dividend, the corporation elects under subsection 83(2) using Form T2054. The election must be made at or before the earlier of the time the dividend becomes payable and the first day any part of it is paid. The dividend is then not included in the shareholder’s income. A late election is possible under subsection 83(3), but it carries a penalty under subsection 83(4) that cannot exceed $500 for each year of delay, prorated by month, and the estimated penalty must be paid when the late election is filed. If you file the T2054 with certified software and have never filed a T2054 or Schedule 89 before, the CRA says to file Schedule 89 (a request to verify the CDA balance) first.

Electing more than the CDA balance creates Part III tax on the excess, so confirm the balance before the directors’ resolution. Timing also matters at year end: because capital losses reduce the CDA, a holdco that realized gains earlier in 2026 and plans to sell losing positions later may want to pay the capital dividend before those losses are realized. Our tax-loss selling guide covers the trading-date side.

How does passive income shrink your operating company’s small business limit?

Under subsection 125(5.1), a CCPC’s federal business limit is reduced by $5 for every $1 of “adjusted aggregate investment income” above $50,000, earned by the CCPC and every corporation it is associated with, in their taxation years that ended in the previous calendar year. At $150,000 the limit is zero. Adjusted aggregate investment income is calculated in Part 2 of Schedule 7 and is close to, but not identical to, aggregate investment income.

The time lag is what makes this a year-end issue. Passive income your holdco earns in its 2026 taxation year reduces your operating company’s business limit for its taxation year ending in 2027. Example: if the associated group has $90,000 of adjusted aggregate investment income in 2026, the 2027 federal business limit falls by $200,000 (5 x $40,000), from $500,000 to $300,000. The $200,000 that loses the small business deduction is taxed federally at 15% instead of 9%, about $12,000 more federal tax.

Ontario chose not to follow this measure. The Ontario Ministry of Finance states that Ontario “does not parallel” the federal phase-out for passive investment income, so the Ontario lower rate of 2.2% continues to apply to the first $500,000 of active business income. Association rules, and how the shared limit is allocated, are covered in Associated corporations and the business limit grind.

How are dividends between your opco and holdco taxed?

Taxable dividends one Canadian corporation receives from another are generally deductible under section 112, so they are not taxed under Part I. A private corporation may instead owe Part IV tax:

• Portfolio (non-connected) dividends, such as dividends on public shares, are subject to Part IV tax at 38 1/3%.
• Dividends from a connected corporation attract Part IV tax only to the extent the paying corporation received a dividend refund for paying them. A corporation is connected if the recipient controls it, or owns more than 10% of its voting shares and shares worth more than 10% of its total value.

Part IV tax is refundable. It is added to ERDTOH or NERDTOH depending on the type of dividend and comes back when the holdco pays dividends to its own shareholders. Large intercorporate dividends can also be recharacterized as capital gains under the anti-avoidance rule in subsection 55(2), so a significant opco-to-holdco dividend should be reviewed before it is declared.

What should a holding company do before its 2026 year end?

• Estimate 2026 adjusted aggregate investment income for the whole associated group. It sets the 2027 federal business limit for your operating company.
• Check RDTOH balances and decide on dividends. A refund is only available for dividends paid in the year, and eligible dividends can only draw on ERDTOH.
• Confirm the CDA balance and, if you plan a capital dividend, file the T2054 at or before the payable date. Consider paying it before realizing capital losses.
• Review intercorporate dividends for Part IV tax and section 55(2) exposure.
• Weigh dividend timing against the 2027 change to Ontario’s non-eligible dividend tax credit.
• Plan for the three-year filing limit on dividend refunds; a late T2 can forfeit the refund entirely.

Frequently asked questions

What is the tax rate on investment income in an Ontario holding company in 2026?

About 50.17%: federal 38.67% (28% after the abatement plus the 10 2/3% additional refundable tax) and Ontario 11.5%. Part of this, 30 2/3% of the investment income, is refundable when the company pays taxable dividends.

How much is the dividend refund?

38 1/3% of taxable dividends paid in the year, limited by the refundable dividend tax on hand at year end. Eligible dividends draw only on the eligible pool (ERDTOH); non-eligible dividends draw on the non-eligible pool (NERDTOH) first.

What goes into the capital dividend account?

Mainly the non-taxable half of capital gains, reduced by the non-deductible half of capital losses, plus capital dividends received from other corporations. It is paid out by filing Form T2054 at or before the time the dividend becomes payable.

Does passive income in my holdco affect my operating company’s tax rate?

Federally, yes, if the companies are associated. Adjusted aggregate investment income above $50,000 reduces the federal small business limit by $5 per $1, to zero at $150,000, starting the following year. Ontario does not apply this reduction.

Is a dividend from my operating company to my holdco taxable?

It is generally deductible under section 112, so no Part I tax applies. Part IV tax applies only to the extent the operating company receives a dividend refund for paying it, and the dividend should be checked against subsection 55(2).

Official sources

• CRA: Corporation tax rates
• CRA: T2 Guide, Chapter 6 (refundable portion of Part I tax, RDTOH, dividend refund)
• CRA: T2 Guide, Chapter 7 (refundable tax on CCPC investment income)
• CRA: T2 Guide, Chapter 4 (small business deduction and passive income reduction)
• Income Tax Act, section 83 (capital dividend election)
• Income Tax Act, section 125 (business limit reduction)
• Ontario Ministry of Finance: Corporate Income Tax

General information only, not tax or legal advice. Figures are current as of November 2, 2026 and can change; confirm your situation with a qualified advisor before acting. Insight Accounting CPA Professional Corporation, Mississauga, Ontario.