How is Investment Income treated for tax purposes for Canadian Corporations?

Investment income earned by Canadian Controlled Private Corporations (“CCPC’s”) includes rent received (Canadian and foreign), interest, royalties, dividends, and taxable capital gains. CCPC’s pay income tax at a rate of 48% on investment income.This is significantly higher than the tax rate of 15.5% levied on business profits.

However, there is some good news. A portion of the tax paid on investment income is refundable! About 26% of the tax paid on investment income will be refunded to your corporation, when your corporation distributes dividends from its profits to its shareholders. For every 3 dollars of dividends paid, 1 dollar of tax is refunded. The refundable portion of tax on investment income is referred to as Refundable Dividend Tax On Hand (RDTOH).

For example, assume that your corporation earned $100,000 in investment income in the year. Your corporation would pay income tax of $48,000. Of the $48,000 of tax paid, $26,000 is refundable (i.e. RDTOH). If your corporation pays $78,000 in dividends to its shareholders, then all of the $26,000 of tax will be refunded to your corporation.

ABOUT THE AUTHOR

ALLAN MADAN

CA.CPA.CGA

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.

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