Investment income may be subject to refundable tax. Portfolio dividends may be subject to Part IV tax. Part IV tax is added to the refundable dividend tax account, refundable when taxable dividends are paid at a rate times taxable dividends that are paid. Investment income includes net rental income, taxable capital gains.

The concept of tax integration in Canada is that one should be indifferent in earning income directly or indirectly through a Canadian corporation. Generally, this concept is not always perfect due to differences in provincial tax rates. Generally, there is a tax deferral as there is a positive difference in the personal tax on income realized directly as opposed to the corporate tax on the same income earned by the corporation prior to distributing the income to the shareholder. The personal tax depends on your marginal tax rate before earning that income. However, when the income is distributed to the shareholder in the form of dividends, there may be an absolute tax cost of earning that particular income in the corporation over a number of years. The deferral or time from in leaving the income in the corporation will determine the cost versus benefit. Your individual cash flow requirements such as funds for RRSP contributions and personal expenditures will determine your remuneration mix.

For 2025, those at the top personal tax rate in Ontario, realizes a tax deferral on active business income under $500K of about 41.33% and about 27.03% on ABI over $500K. The absolute tax cost is about .59% with regards to active business income to $500K and about 2.01% with regards to active business income over $500K.

For 2025, investment income (other than Canadian portfolio dividends), the deferral is about 3.36% with an absolute tax cost of about 4.40%.

For Canadian portfolio dividends, the deferral is about 1.01% for eligible dividends and about 9.41% for non-eligible dividends. Eligible dividends arise from the GRIP account, generally dividends from Canadian public corporations. On distribution of public corporation dividends, there is no savings or absolute tax cost, thereby earning such dividend income through a corporation as opposed to earning it personally is neutral.

To preserve integration, due to the change in federal corporate and personal tax rates in 2016, investment income is currently subject to refundable Part I tax of 30.67% of investment income. This forms the RDTOH (refundable tax on hand account). The Part I federal tax rate on investment income is currently 38.67% resulting in a combined 2025 Federal/Ontario tax rate of 50.17%. Portfolio dividends are subject to Part IV tax of 38.33%. Part IV tax is added to the RDTOH account, refundable when taxable dividends are paid at a rate of 38.33% times taxable dividends that are paid. Investment income includes net rental income, taxable capital gains.

Commencing in 2019, there is a grind to small business limit (“SBL”) where passive income in the prior year is over $50K and phases out when passive income is over $150K. Similar grind may occur where there are associated corporations withing the group. There are also changes to the RDTOH account that are currently split it into two accounts.

For non-CCPCs, the tax rate is 26.5% on investment income and active business income. This rate applies to non-resident corporations carrying on business in Ontario or making a Section 216 election to be taxed on rental income on a net basis by filing a T2 corporation return as opposed to the flat non-resident withholding tax of 25% on gross rentals.

The federal non-refundable R&D tax credit on current expenditures is 35% for CCPCs and 15% for non-CCPCs. The 35% rate drops to the 15% rate if qualified expenditures exceed $3M, but this $3M limit is expected to increase to $6M for tax years commencing after December 16, 2024.

The Ontario 2016 budget reduced the non- refundable, (i.e., to be applied to otherwise tax payable) Ontario Research and Development Tax Credit (“ORDTC”) to 3.5%. The refundable Ontario Innovation Tax Credit (“OITC”) was reduced from 10% to 8% which means there is a refund regardless of otherwise tax payable.

The OMMITC is refundable corporate income tax credit introduced in 2023 designed to support manufacturers in Ontario by encouraging investment in buildings, machinery, and equipment used for manufacturing or processing.  The 2025 Federal Budget introduced temporary increase from 10% tot 15% for eligible investments made after May 15, 2025, and before January 1, 3030.

Refundable means a refund regardless of otherwise tax payable.

The annual cap increased from $2M before 2025 to $3M after 2025 per associated group.

The 2025 Budget expanded this 15% credit to non-CCPCs that have a permanent establishment in Ontario, but the credit is non- refundable (to be applied to otherwise tax payable) and is also available for eligible investments made after May 15, 2025, and before January 1, 3030.

You should consult with your professional advisor on all related matters