Investment income earned inside a corporation is called aggregate investment income and is taxed an additional 10.67% to the standard corporate tax. Aggregate investment income consists of interest, rent, royalties and taxable capital gain. The total tax on investment income is 19.5% combined federal and provincial rate.
The breakdown of the tax on investment income is as follows:
General Corporate tax 38%
Abatement (10%)
Additional refundable tax 10.67%
RDTOH (30.67%)*
Total federal rate 8%
Provincial tax rate 11.5%
Total Tax 19.5%
*The CRA refunds 30.67% of the aggregate investment income as part of the refundable dividend tax on hand when the dividend related to the investment income is paid out. This effectively lowers the corporate tax rate on investment income earned inside a corporation. This is done to discourage people from keeping income earned from investments inside of the corporation, to take advantage of the lower corporate tax rate.
Capital gains
Only 50% of capital gains earned in a corporation are taxable and the other 50% of the capital gains can be distributed to the shareholder tax free as capital dividends. As a result, the tax on capital gains would 19.5% on the taxable portion. This is normally much lower then the capital gain earned at a personal level where 50% of the capital gains is included taxable income, however, at the incremental tax rate. This means anyone earning more then the lowest tax bracket at an individual level will end up paying more in taxes on capital gains then they would pay inside a corporation.
Disclaimer
The information provided on this page is intended to provide general information.
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