It is common for owners of Canadian-controlled private corporations to retain assets within their corporation to benefit from tax-deferral opportunities. Whether the corporation is primarily for business or investment purposes, understanding how investment income is taxed in a corporation can maximize wealth over time.
Below are 2021 corporate income tax rates for interest, portfolio dividends and capital gains earned within an Ontario- resident corporation.
|Province||Interest/other income||Dividends1||Capital gains|
1Canadian dividends (eligible and non-eligible).
At some point, owners of incorporated businesses will want to extract their investment income from the corporation. The payment is normally made in the form of a dividend, taxable at personal tax rates. Below are 2021 combined (corporate and personal) income tax rates for interest, portfolio dividends and capital gains earned through an Ontario-resident corporation.2
|Province||Interest/other income||Dividends3||Capital gains|
2 Rates shown account for refundable taxes paid to the corporation when taxable dividends are paid to shareholders. 3 Canadian eligible dividends.
Considerations for corporate investors
- Investment income is not eligible for the small business deduction that applies to active business income. Investment income is taxed at higher corporate tax rates.
- With a 50% inclusion rate, capital gains are the most efficient form of taxable investment income.
- Generally, income is taxed when received; capital gains are taxed only when realized.
- The non-taxable portion of capital gains (50% of realized gains) is added to the corporation’s capital dividend account and can be paid to shareholders tax-free.
- Realized capital losses reduce the capital dividend account, reducing the opportunity to pay tax-free capital dividends to shareholders. For this reason, capital dividends are often paid as soon as possible.
- Depending on the amount, investment income can reduce access to the small business tax rate for active business income. Compared to other forms of passive income, however, capital gains have a lesser impact.
- Corporate class mutual funds are designed to generate capital gains over time and can be advantageous from a tax perspective for both individual and corporate investors.
- When selecting corporate investments, be mindful of risk tolerance and investment objectives.