Tax deferral opportunities are available on investment income earned within a private Canadian corporation. Learn the intricacies of how a corporation and its shareholders are taxed on investment income.
Owner of a Canadian controlled private corporation (CCPC) has the option to earn investment income (interest income, rent, taxable capital gain, and dividends from Canadian corporations) within their corporation or personally.
Investment income earned within a CCPC is taxed at a significantly higher rate than business income. The rate of tax on such a corporation’s investment income can be more than 50 percent.
Although at the outset it may seem absurd to invest through a CCPC, this option provides the company owner an opportunity to defer tax. Generally, tax deferral is advantageous to the owner who is in the highest personal tax bracket. Professional tax advice should be sought to determine if investing through a corporation would be a prudent alternative. Contact Alpha Accountzy for one-on-one consultation.
Below we discuss how investment income is taxed within a corporation.
The Canadian tax system is designed based on the concept of integration, which means that a business owner investing funds through a corporation should pay the same amount of tax as if he had earned the same income personally. To achieve this objective, the CCPC is taxed at around 50 percent on its investment income and receives a tax refund once a dividend is paid to the shareholder. After the payment of dividend, CCPC’s net tax payable almost equals to what an individual would have paid on the same investment income.
Refundable dividend tax on hand (RDTOH)
RDTOH account is an notional account which tracks the running total of the amount of refund a CCPC can be entitled to as a result of paying dividends to its shareholder. The RDTOH balance increases when refundable tax is paid and decreases when a tax refund is received.
RDTOH consists of part I tax and part IV tax.
Part I tax
Upon earning investment income, CCPC is taxed an at an upfront rate of 30.67 percent of investment income. This "refundable tax" is added to the CCPC’s RDTOH account. Thereafter, the CCCPC becomes eligible for a tax refund when a taxable dividend is paid to the shareholder; the refund is equal to 38.33 cents for every $1 of dividend paid.
Part IV tax
Part IV tax applies to dividends from Canadian corporations. These dividends are subject to a fully refundable tax of 38.33 percent.
For professional advice contact Alpha Acccountzy, Accounting & Tax Solutions.
