Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to structuring or resolving disputes involving rental income, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Canadian tax lawyers and attorneys skilled and experienced in tax law for Ontario and Canadian corporations. Feel free to make a post on Dynamic Lawyers (it’s 100% free and anonymous).
In this blog, I’ll be discussing the tax implications of earning rental income through a Canadian Controlled Private Corporation ["CCPC"] in Ontario.
So let say you own a CCPC which owns some real property (e.g. a house or condo unit). The real property generates rental income. How will that income be taxed at the corporate level before it gets to you? Remember: I won’t be discussing the tax implications (i.e. dividend gross up and tax credit for non-eligible dividends) at the shareholder level in this blog. So lets get it started…
Well, first off, that type of income – rental income – falls under the definition of “aggregate investment income” (s. 129(4)(b) of the Canada Income Tax Act). Since it’s not “active business income“, the CCPC will not be able to take advantage of the small business credit (which reduces the corporate tax rate to only 16.5% on the first $500,000 of active business income of a CCPC). Furthermore, since “aggregate investment income” is excluded from the definition of “full rate Taxable Income” under s. 123.4(b)(iii) of the ITA, the CCPC will not be eligible for the General Rate Reduction of 9%. Taken together, this means that the starting point of the corporate tax rate on this type of income is 42%.
But that’s not the end of it! Governments want to discourage people from using corporations to defer tax on investment income. That’s why there is an Additional Refundable Tax ["ART"] on aggregate investment that qualifies for a dividend refund. Essentially, the government wants to punish corporations that horde aggregate investment income (i.e. which don’t pass along the income through dividends to their shareholders). ART is an additional tax of 6⅔% on aggregate investment income of CCPCs. In theory, the additional 6⅔% ART will make the corporate tax rate (assumed to be 40%) for CCPCs roughly equal to the highest individual marginal tax rate (currently 46.41% in Ontario). So, adding the ART to where we left off above, you’ll end up with a CCPC tax rate on aggregate investment income of 48.67%!
Basic Combined Federal and Provincial CCPC Tax Rate For Aggregate Investment Income
38% – Rate for Corporations – s. 123(1)(a) of the Canada Income Tax Act ["ITA"]
- 10% – Deduction from Corporation Tax – s. 124(1)
+ 14% – Ontario Corporate Tax Rate – from the CRA’s website
+ 6⅔% – Additional Refundable Tax – s. 123.3
= 48⅔ or 48.67% as the Basic Combined Federal and Provincial CCPC Tax Rate for Aggregate Investment Income
So, if you’re still with me, you’ll probably be saying: OUCH – THAT’S A HIGH TAX RATE! But wait – there’s relief! When the CCPC pays out dividends to shareholders from that aggregate investment income, the CCPC will get a tax refund: the CCPC gets back 26⅔% of the aggregate investment income paid out as dividends to their shareholders: s. 129(1)(3)(a). So if $100 of aggregate investment income is earned but paid out as dividends to shareholders, the CCPC initially pays $48.67 in taxes but will get a refund of $26.67, which means that it only paid $20 of taxes on this type of income.
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