How is Rental Income Taxed by a CCPC?
Allan Madan, CPA, CA
This video will review the taxation of rental income earned by a CCPC and tax tips and tricks you can tax advantage of.
What is a CCPC?
Let’s take the example of Rick, the real estate king of Ontario. Rick incorporated a company in Ontario to purchase a rental property. The rental property generates an annual profit (after expenditures) of $10,000. Given that Rick is a Canadian resident, his company is classified as a Canadian Controlled Private Corporation (CCPC).
Taxation of Investment Income
Rental income is classified as passive income for tax purposes, and has a much higher corporate tax rate. In fact, the corporate tax rate on passive income is 50.17% compared to only 12.2% on active business income.
As a result, on $10,000 of rental profit, $5,017 of corporate tax is payable. After the payment of tax, the corporation is left with available cash of $4,983.
| Profit | $10,000 |
| Corporate Tax Payable (50.17%) | $5,017 |
| After Tax Cash Available | $4,983 |
The Concept of RDTOH
Poor Rick was dismayed about the amount of corporate tax he had to pay. What Rick didn’t realize was that part of the corporate tax is refundable and the tax term for this is Refundable Dividend Tax On Hand (RDTOH). The refundable portion of the corporate tax is calculated as 30.67% of net rental income, and in Rick’s case this comes to $3,067.
| Rental Income (Net of Expenses) | $10,000 |
| Refundable Portion (RDTOH, 30.67%) | $3,067 |
How is the Tax Refunded?
In order for Rick’s corporation to receive a tax refund, Rick’s corporation has to pay him a dividend. The refund is determined at a rate of 38.33 cents for every $1 of taxable dividends paid, limited to the balance in the RDTOH account.
To get the full $3,067 back, the total dividends paid to Rick must be $8,001.Taking his accountant’s advice, Rick’s corporation paid a dividend to Rick for $8,001. His corporation then received a tax refund of $3,067.
| Dividends Paid to Rick | $8,001 |
| Refundable Tax ($8,001 x 38.33%) | $3,067 |
*Limited RDTOH Balance of $3,067
Personal Tax Paid on Dividends
Rick will pay tax on the dividend he received. Since Rick is the Real Estate King of Ontario, he is in the highest personal tax bracket. And so the tax rate applied to regular dividends (also known as non-eligible dividends) is 47.74%.
As a result, Rick now owes personal tax of $3,820 on the dividends received.
| Dividends Paid to Rick | $8,001 |
| Personal Tax Paid by Rick (47.74%) | $3,820 |
Conclusion
At the end of the day, what’s the total amount of corporate tax and personal tax paid? First, Rick’s company paid corporate tax of $5,017. Second, Rick’s company received a dividend refund of $3,067. Third, Rick paid personal tax of $3,820.
So the total amount of tax on $10,000 of net rental income is $5,770 or 57.77%!Once Rick got the bad news, he fled to the Cayman Islands.
| Corporate Tax Payable | $5,017 |
| Dividend Refund for Corporation | ($3,067) |
| Personal Tax Paid by Rick | $3,820 |
| Total Burden of Tax | $5,770 |
Disclaimer
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
ABOUT THE AUTHOR
ALLAN MADAN
CPA, CA
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
