Understanding Taxation of Rental Income by a CCPC

Introduction:This article delves into how rental income is taxed when earned by a Canadian Controlled Private Corporation (CCPC).

What is a CCPC?To illustrate, let’s consider Jack, a prominent real estate figure in Ontario. Jack set up a corporation in Ontario to buy a rental property. This property brings in a yearly profit of $10,000 after all expenses. Since Jack resides in Canada, his company is recognized as a CCPC.

How is Investment Income Taxed?Rental income is viewed as passive income for taxation. It’s subject to a significantly higher corporate tax rate. Specifically, passive income faces a 50.17% tax rate, while active business income is taxed at just 12.2%. This means that from a $10,000 rental profit, a whopping $5,017 goes to corporate tax, leaving the company with $4,983.

Understanding RDTOH:Jack was initially shocked by the hefty corporate tax. However, he soon learned about the Refundable Dividend Tax On Hand (RDTOH). A portion of the corporate tax is refundable, calculated as 30.67% of the net rental income. For Jack, this amounts to $3,067.

How is the Tax Refunded?To get this tax refund, Jack’s company needs to pay him a dividend. The refund rate is 38.33 cents for every dollar of taxable dividends paid, up to the RDTOH balance. To reclaim the full $3,067, Jack’s company paid him dividends worth $8,001, leading to a tax refund of $3,067 for the corporation.

Personal Tax on Dividends:Jack has to pay tax on the dividends he receives. Being a top real estate figure in Ontario, he falls into the highest personal tax bracket. The tax rate for regular dividends (non-eligible dividends) for him is 47.74%. This means Jack has a personal tax liability of $3,820 on the received dividends.

Final Tally:Summing up, the company initially paid $5,017 in corporate tax. It then received a dividend refund of $3,067. Jack, on the other hand, paid a personal tax of $3,820. This means the total tax on the $10,000 net rental income is $5,770, which is 57.77%. Upon hearing this, Jack decided to take a trip to Barbados.