09/23/2025
If you're a Business Owner or Incorporated and looking to invest extra cash here’s a friendly breakdown of how Corporate Non-Registered Investments are taxed in Canada.
1. The Basics
When a corporation invests its extra cash (in stocks, bonds, mutual funds, GICs, etc.), the income it earns isn’t sheltered like an RRSP or TFSA. Instead, the income is taxable inside the company each year.
There are three main types of investment income:
Interest income (e.g., GICs, bonds)
Dividends (from Canadian or foreign companies)
Capital gains (from selling an investment for more than it cost)
2. Interest Income
Fully taxable in the corporation at the high passive investment tax rate (often 50%+ depending on province).
Part of this tax is refundable later when dividends are paid to shareholders (see RDTOH below).
👉 Key point: Interest income is the least tax-efficient form of investment income for a corporation.
3. Canadian Dividends
When your corporation receives dividends from Canadian public companies, they are taxed at a high rate initially.
But part of the tax goes into a refundable account (RDTOH). When your corporation pays dividends to you (the shareholder), some tax is refunded back to the corporation.
👉 Key point: The system is designed so that, in the end, you and your company together pay about the same tax as if you had earned the dividend personally.
4. Foreign Dividends
No dividend tax credit in Canada.
Taxed just like interest income at high passive rates.
Foreign withholding taxes (e.g., U.S. 15%) usually apply and cannot be fully recovered inside a corporation.
👉 Key point: Foreign dividends are the most heavily taxed type of investment income in a Canadian corporation.
5. Capital Gains
Only 50% of a capital gain is taxable inside the corporation.
The taxable half is taxed at high passive rates (again, with part refundable).
The non-taxable half goes into the Capital Dividend Account (CDA), which can be paid out tax-free to shareholders.
👉 Key point: Capital gains are the most tax-efficient type of income in a corporation.
6. Refundable Tax System (RDTOH)
Corporations pay very high upfront tax on passive investment income.
A portion of that tax goes into a notional account called Refundable Dividend Tax on Hand (RDTOH).
When the company pays out dividends to shareholders, some of that tax is refunded to the company.
👉 Key point: The government ensures overall tax integration, but you have to actually pay yourself dividends for the refund to happen.
7. Small Business Deduction Grind
If a corporation earns more than $50,000 of passive investment income in a year, its small business limit (the $500,000 of active business income taxed at the low small-biz rate) starts to shrink.
At $150,000 of passive income, the small business deduction is completely eliminated.
👉 Key point: Too much investment income can increase the tax rate on your active business profits.
8. Big Picture
Interest & foreign dividends = least tax-efficient
Canadian dividends = neutral (after refunds)
Capital gains = most tax-efficient (plus tax-free CDA)
✅ KEY Takeaway: Corporate investing is advantageous, but the type of investment income matters a lot. A proper tax-efficient investment strategy to align with Corporate & Personal goals can save significant tax over time.
We're here to help. Please reach out if you have any questions!
