Thread by @MarkMcGrathCFP

If you're incorporated, you should understand these terms:

1. CDA
2. NERDTOH
3. ERDTOH
4. GRIP

These are notional accounts - they exist on paper, not at your bank.

Here's what they mean:

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1. CDA

Capital Dividend Account.

The amount of tax-free dividends you can pay yourself from your corporation.

Most commonly, this comes from the tax-free half of capital gains generated through your corporate investment portfolio.

Life insurance payouts can add to this too.

It often makes sense to pay out your CDA when you can.

It's after-tax money trapped in your corporation.

You can use it to fund your TFSA, your kids' RESP, or pay down debt, for example.

2. NERDTOH

Non-Eligible Refundable Dividend Tax On Hand.

Taxable investment income in a corporation is subject to high tax rates, around 50% depending on your province.

On interest, rents, royalties, or the taxable half of capital gains, 30.67% of that is a withholding tax.

That withholding tax goes to your NERDTOH balance.

Then, when you pay yourself a non-eligible dividend, your corporation gets refunded the NERDTOH at 38.33% of the dividend paid.

Example:

$100 of interest income x 50% tax = $50 in taxes.

But 30.67%, or $30.67, goes to your NERDTOH Balance.

The remainder - $19.33 in this example - is pure, unrecoverable tax.

Pay yourself an $80 non-eligible dividend, and you get back 38.33% of it up to your NERDTOH balance.

$80 x 38.33% = $30.67.

Another way to think about it - to recover NERDTOH, you need to pay dividends of 2.61x your NERDTOH balance.

$30.67 x 2.61 = $80 in dividends needed.

3. ERDTOH

Eligible Refundable Dividend Tax On Hand.

Like NERDTOH, but is withheld on eligible dividend income - usually from Canadian stocks in your corporate portfolio.

The difference is the whole tax is withholding tax - there's no unrecoverable tax.

Eligible dividends are taxed at 38.33%, and it all goes to ERDTOH.

Like NERDTOH, you get back 38.33% of it when you pay eligible dividends.

Example:

$100 of eligible dividend income x 38.33% = $38.33 ERDTOH balance.

Pay a $100 dividend, and you get back the whole $38.33.

Because there's no unrecoverable tax, eligible dividends can 'flow through' the corporation.

The corporation pays no tax as long as you pay yourself enough eligible dividends to get the full ERDTOH back.

This makes Canadian stock dividends pretty tax efficient.

4. GRIP

General Rate Income Pool.

Tracks income taxed at the higher general rate.

That's income over $500k in most provinces as well as Canadian stock dividends.

When you pay eligible dividends, it reduces your GRIP.

For example, say you had $600k of net income in BC.

You would have $500k of small business income and $100k of income taxed at the general rate.

That $100k gives you a GRIP balance of $100k.

If you pay a $40k eligible dividend, you'd have a $60k GRIP balance left.

Since GRIP has been taxed at the higher general rate, when you pay it out you get an enhanced dividend tax credit so you pay less tax personally.

The net effect is that whether you pay eligible or non-eligible dividends, that money has been taxed more or less the same.

Corporate taxes are confusing.

But don't worry, your accountant should be tracking all of this for you.

So next time they mention your NERDTOH, you'll know they aren't talking about your weird feet.

I post daily, Monday to Friday.

Usually about financial planning for Canadian Physicians and business owners.

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