Earning Investment income in a CCPC and Refundable tax

Investment income of a CCPC and refundable dividend tax on handWhat is the investment income of CCPC?

Investment income includes income from property such as rental income, interest income, dividends, and royalties. Rental income can be either business income or investment income depending on the situation.

Corporation tax rates are lower in Canada as compared to personal income tax rates. Corporate tax rates are further lowered for Canadian Controlled Private Corporations (CCPC). However, there is an integration between Corporate and Personal taxation so that individuals who draw income from corporations are taxed at the same personal marginal tax rates.

Dividends distributed from corporations can be eligible or non-eligible dividends. Both of these dividends have different dividend tax credits available to individuals – mainly – because of the fact that corporate profits are taxed at different rates. CCPCs enjoy small business deduction on their first $500,000 of active business income which lowers the tax rates significantly as compared to Non-CCPCs.

Earning investment income in a CCPC

When an investment income is earned in a CCPC, it impacts small business deduction. Investment income includes passive income such as interests, royalties and dividends, and property income such as rental income.

What is a Refundable Dividend tax?

Earning investment income in a CCPC can create an advantage of a lower tax rate if refundable tax is not levied. To ensure that there is no such advantage for earning investment income in the corporation instead of directly by an individual, refundable dividend tax exists.

While filing corporation income tax return, schedule 7 is filled in to determine the aggregate investment income and reduction is small business deduction. As a result, a refundable dividend is levied on investment income. This refundable dividend is refunded to the corporation only when an eligible or non-eligible dividend is distributed to individual shareholders by the corporation.

The refundable dividend tax on hand (RDTOH) is used to track this refundable portion of the tax. For the tax years after 2018, RDTOH is replaced by Eligible RDTOH (ERDTOH) and Non-Eligible RDTOH (NRDTOH).

2019 Transitional Rules from RDTOH to new NRDTOH and ERDTOH

For the tax years starting after 2018, any existing balance in RDTOH account will be rolled into new NRDTOH and ERDTOH.

ERDTOH opening balance will be lesser of 38.33% of a CCPC’s General Rate Income Pool (GRIP) or the existing RDTOH balance. So, CCPC’s GRIP balance must have 2.6X of its RDTOH balance in order to transfer all the RDTOH balance into ERDTOH. This is called transitional RDTOH Amount. An existing RDTOH balance other than the transitional amount will be added to NRDTOH. If a CCPC does not have GRIP balance, its RDTOH will be rolled into NRDTOH.

The rules related to the investment income of CCPCs and refundable dividend tax are complex rules and usually require the services of a professional corporation or a professional accountant in Canada. The above post is for users who understand the concepts and is not updated after being published, readers are cautioned to exercise caution while using the above information.

Maroof HS CPA Professional Corporation is an Ontario based CPA Firm. We provide corporate tax services in Canada especially accounting and tax services for small and medium businesses in Ontario and Alberta. Get in touch with us regarding Corporate income tax preparation, corporate tax planning and other services.

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