Information for business owners -> Corporate Taxation of Investment Income
Corporate Taxation of Investment Income
Investment income consists of income from property, which would include things like rentals, interest, dividends and royalties. However, see our article on Rental Income - Property Income or Business Income?, as rental income can also be considered business income.
The corporate income tax rate on capital gains is 50% of the tax rate on investment income, because only 50% of a capital gain is taxable.
When the principal business of a corporation is to earn investment income (income from property), the corporation is usually considered a specified investment business, and is not eligible for the small business deduction.
There is no gross-up or dividend tax credit for dividends received by a corporation. Dividends received from Canadian corporations may be deductible under s. 112 of the Income Tax Act (ITA), but Part IV tax (ITA s. 186-187) may be payable on these dividends at a tax rate of 38 1/3% (33 1/3% for taxation years ending before 2016) of the dividends received. Part IV tax becomes part of the corporation's refundable dividend tax on hand (RDTOH). RDTOH is available as a dividend refund to the corporation when dividends are paid to shareholders of private corporations.
The federal tax rate of 38.7% on investment income includes a 10.67% (6.67% for taxation years prior to 2016) refundable tax as per s. 123.3 of the ITA, which becomes part of RDTOH.
The federal government, in July 2017, brought out proposed tax changes related to private corporations. One of the proposals was to eliminate the RDTOH. See also December 2017 Small Business Tax Changes, which has links to several articles re income sprinkling and tax on split income (TOSI). The 2018 federal budget included proposed changes to the RDTOH instead of eliminating it, as well as proposed changes to reduce the business limit based on investment income of the CCPC.
See Corporate Income Tax Rates for current and prior tax rates.
Tax Tip: If you have a CCPC and significant investment income, make sure you get professional tax advice regarding the small business deduction!
Revised: October 26, 2023