|Active business income up to $500K||Active business income exceeding $500K||Investment income|
The foregoing table is for 2018. See below commentary on changes made in 2016 & 2019.
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 2018, those at the top personal tax rate in Ontario, realized a tax deferral on active business income under $500K of about 40% and about 27% on ABI over $500K. The absolute tax cost is about .49%. For investment income (other than Canadian portfolio dividends), the deferral was about 3.36% with an absolute tax cost of about 3.68%. For Canadian portfolio dividends, the deferral is about 1.01% for eligible dividends and about 8.51% for non-eligible. Eligible dividends comes from the GRIP account, generally dividends from Canadian public corporations. On distribution, there is no savings or absolute tax cost, thereby earning dividend income through a corporation as opposed to earning it personally is neutral.
In order to preserve integration, due to the change in federal corporate and personal tax rates in 2016, investment income is now subject to refundable Part I tax of 30.67% of investment income, an increase from 26.67%. This forms the RDTOH (refundable tax on hand account). The Part I federal tax rate on investment income increases to 38.67% from 34.67% resulting in a combined 2018 Federal/Ontario tax rate of 50.17%. Portfolio dividends will be 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.
2018 Federal Budget
Commencing in 2019, there is a grind to SBL where passive income in the prior year is over $50K and phases out when passive income is over $150K. There are also changes to the RDTOH account that will be 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 R&D tax credit on current expenditures is 35% for CCPCs and 15% for non-CCPCs.
The Ontario 2016 budget reduced the Ontario Research and Development Tax Credit (“ORDTC”) to 3.5% from 4.5%. The Ontario Innovation Tax Credit (“OITC”) was reduced from 10% to 8%. Both changes were effective for eligible R&D expenditures incurred in taxation years ending on or after June 1, 2016.