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

Allan Madan, CA
 Nov 12, 2013
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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.

 

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.

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