How is Rental Income Taxed by a Corporation in Canada

Allan Madan, CA
 May 26, 2021
Share
0 Comments
Share

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).

Rick’s company is considered to be a CCPC because he is a Canadian resident
Rick’s company is considered to be a CCPC because he is a Canadian resident

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 Coporation

($3,067)

Personal Tax Paid by Rick

$3,820

Total Burden of Tax

$5,770

Rick’s best solution to his tax issues was to fly to the Cayman Islands
Rick’s best solution to his tax issues was to fly to the Cayman Islands

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.

Related Resources

Leave Your Comment Here:
Required fields are marked.

Your email address will not be published. Required fields are marked *

five × one =

Pin It on Pinterest

Share This