Investment Income
Rental income, interest and dividends are called investment incomes and are taxed differently than the active income.
When a corporation receives rental income or interest income from long-term investments, this income is called specified investment business income. This kind of income is taxed at a higher rate.
In most provinces this the rate of tax for this kind of income is over 50%.
CRA does not allow any deferral of taxation on investment income earned by the corporation and this income is taxed at the highest marginal rate.
Under the refundable taxes mechanism, if a corporation earns investment income and pays tax on that income, a refund of taxes paid is available to the corporation.
The corporation gets a refund of taxes paid when it pays a dividend to its shareholders.
The refund is actually a cash refund to the corporation paying the dividend. This refund reduces the corporations’ tax liability on the investment income, bringing the effective tax rate down.
When looking at investment income in a corporation, consider the total tax rate after the available refund. The refund of this tax is available to Canadian-controlled private corporations only.
If the dividends are not paid in a year, the refund does not disappear. Rather the corporation maintains an account with the CRA which is called the “refundable dividend tax on hand” or RDTOH account.
This account summarizes the total amount of refund available to the corporation when it pays a dividend to its shareholders.
No interest is paid on this account. So if a corporation pays the high rate of tax on its investment income, and does not pay a dividend until several years later, the refund will only be for the tax without interest.
Mansoor Suhail (Mani)
Accountant
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