Effective January 1, 2019 Canadian Controlled Private Corporations (CCPC) who earn Passive Income are subject to new legislation which results in an increase in the amount of income taxes paid by the corporation. While there has been much discussion regarding these changes, they are now in place.
As with all taxation, planning becomes of the utmost importance to ensure that you do not pay one nickel more in taxes than is absolutely necessary under the legislation.
Rental, Royalties, Interest Income
These types of Passive Investment Income earned inside a CCPC are Part I tax and will be taxed at a Federal rate of 38.67%. Of the 38.67%, the CCPC will receive a “Refundable Dividend Tax on Hand” credit (RDTOH) of 30.67% when a taxable non-eligible dividend is paid out to the shareholders. This results in a net corporate tax of 8%. In addition, provincial governments will also tax this income at their respective general tax rate. In Ontario, this is 11.5% resulting in an up-front tax of 50.17% and a net tax of 19.5% inside the CCPC.
Portfolio Dividends
Dividends earned within a CCPC paid by a public corporation are “eligible dividends” and are taxed as Part IV tax. Part IV tax is a Federal tax only with a rate of 38.33%. Much like “non-eligible dividends”, Part IV tax becomes a “Refundable Dividend Tax on Hand” (RDTOH) which is refunded to the corporation when a taxable dividend is paid out to the shareholders. The RDTOH is also 38.33% resulting in a net tax of zero. Provincial governments do not tax “eligible dividends” therefore there is zero provincial tax implications.
The net result in that although a CCPC will pay tax of 38.33% on eligible portfolio dividend income, the entire tax is refundable once a taxable dividend is paid to the shareholders. From a purely tax point of view, this makes dividend income producing investments attractive.
Capital Gains
Capital gains/losses earned within a CCPC are Part I tax and subject to the same tax rates. The difference however, is that Capital Gains are taxed on only one-half of the gain and only one-half of any losses are allowed. This results in the Federal tax rate becoming one-half of the Part I tax rate – 19.34% of which 15.34% is eligible for the Part I RDTOH leaving a net federal corporate tax of 4%. In addition, provincial governments will also tax one-half of this income at their respective general tax rate. In Ontario, this is 5.75% resulting in an up-front tax of 25.09% and a net tax of 9.75% inside the CCPC. The “untaxed” 50% portion of accumulated capital gains less losses can be paid out to the shareholders through the Capital Dividend Account and will not be subject to tax – either corporate or personal.
Planning & Structure
As with all tax issues, planning and structure become the most important factor in minimizing the amount of tax paid through the combined family and corporate entities. By putting a structured plan in place in combination with your investments, the impact of the new tax rules can be minimized and controlled.