How Rental Income is Taxed for a Canadian Corporation

Introduction: This article delves into the taxation of rental income earned by a Canadian Controlled Private Corporation (CCPC) and provides insights into tax-saving strategies. 

Understanding CCPC: Using Rick, the real estate mogul of Ontario, as an example, we can understand the concept of a CCPC. Rick set up a company in Ontario to buy a rental property. This property yields an annual profit of $10,000 after all expenses. Since Rick resides in Canada, his company is recognized as a CCPC. 

Tax Implications of Investment Income: Rental income is categorized as passive income for tax reasons. It’s subject to a significantly higher corporate tax rate. Specifically, passive income is taxed at 50.17%, whereas active business income is taxed at just 12.2%. This means that from a $10,000 rental profit, a corporation would owe $5,017 in taxes, leaving $4,983 as post-tax cash. 

RDTOH – A Silver Lining: Rick was initially disheartened by the hefty tax bill. 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 Rick, this amounted to $3,067. 

Claiming the Tax Refund: To claim this refund, Rick’s company needs to pay him a dividend. The refund rate is set at 38.33 cents for every dollar of taxable dividends paid, but it’s capped by the RDTOH balance. To reclaim the full $3,067, Rick’s company disbursed a dividend of $8,001 to him, subsequently receiving a tax refund of $3,067. 

Personal Tax on Dividends: Rick has to pay personal tax on the dividend he received. Being in the highest tax bracket in Ontario, the tax rate for regular dividends (non-eligible dividends) for him is 47.74%. This translates to a personal tax liability of $3,820 on the dividends. 

Final Tax Calculation: Summing up, Rick’s company initially paid $5,017 in corporate tax. It then received a dividend refund of $3,067. On the other hand, Rick had a personal tax bill of $3,820. Therefore, the total tax on the $10,000 net rental income is $5,770, which is 57.77% of the income. After learning this, Rick humorously considered relocating to the Cayman Islands.