Many investors are interested in using a holding company to hold passive investments.  These investments typically include real estate, stocks, ETFs, mutual funds cryptocurrencies, and derivatives.


A common belief among many new investors is that corporations pay lower taxes, so using this logic, it would make the most sense to quarantine all passive income in a corporation and pay less taxes overall.


This may then result in the following actions:

  1. An investor searches online for ‘how to incorporate a company in Ontario’.
  2. The investor reviews several websites offering incorporation and determines that incorporating under the Federal Statue is the least expensive structure and enters credit card information.
  3. A newly incorporated company xxxx Canada Inc. is instantly created, and documents related to the incorporation are pushed out via an automation from the registration site.

At this point, the investor has become a shareholder/director, and has now committed themselves to mandatory tax filings and is obligated to meet the requirements under the relevant Corporations Act in perpetuity until the day the company is dissolved or wound up.


The latter requirements are often overlooked by investors as these filings are done separately from a tax filing. 


The CRA will also send notices of overdue filings to the investor, even if there is no activity in the company as these filings are required to be completed.


The shareholder/director must consider this Corporation as a separate legal entity and ensure that corporate resolutions are passed to approve certain transactions; such as, the declaration of dividends/bonuses, approval of the financial statements, the appointment of other officers, and all other major transactions.  


In addition, the taxation of the Corporation is separate from that of an individual, and therefore calculating combined tax rates is inherently confusing due to the numerous tax rules, various rates, and filing requirements. 


The annual accounting and legal costs to maintain a simple corporation in Ontario with even just a few activities will likely cost a minimum of $2,500. There are of course lower cost approaches for persons wishing to do the work themselves, provided the transactions undertaken are simplistic in nature and fit into the generic templates offered by most online providers.


What was a quick online registration has resulted in the shareholder/director now having an ongoing administrative and financial requirement to maintain a Private Corporation, along with personal liability that is inherent with the position as a director of a corporation.


Is the perceived benefit of a lower tax rate, worth these extra costs and paperwork?  Let’s consider the following:


Corporate Tax on Investment Income

Investors earning income through a corporation typically earn what is referred to as ‘Investment Income’ or ‘Passive Income’.  This type of income typically is not considered Active Business Income and therefore is not eligible for the small business tax rate.  At the time of writing this article, the combined provincial and federal rate for passive income earned in a Canadian Controlled Private Corporation in Ontario is 50.2% with dividend income received from public companies typically being taxed at 38 1/3%[1].


Part of the corporate tax paid may be considered to be refundable tax and refunded to the corporation upon payment of a dividend by the corporation to a shareholder.  


Example – Tax on Dividends from Public Corporations

A simplified example is:


Dividend received from a public company to Owner’s Investment Corporation – $100


Corporate Tax paid by Owner’s Investment Corporation – $38.3 (ie: Corporate Tax Rate of 38.3% on Dividends)


If no further action is taken, the overall tax rate on this dividend is 38.3%.  This tax rate is much higher than the perhaps expected small business tax rate of 12.2% in Ontario.


If the Investment Corporation decided to declare a dividend, the corporate taxes paid on this dividend will be refunded at a rate of $.383 for every $1 of the dividend paid.


In this case, if the Owner’s Investment Corporation declares and pays a $100 dividend to the owner, the Owner’s Investment Corporation will receive a refund of $38.3 (the amount of the taxes previously paid).


The owner will need to include a grossed-up dividend in their personal tax return. Depending on their personal level of income, the tax on this eligible dividend could range from a refund of tax to a tax of ~39%.


It is important to analyze both the corporate and personal levels of taxation in conjunction and compare them to the tax if the investor has held these funds personally. 


The tax system in Canada is meant to be integrated, such that whether income is earned through a corporation or individually as passive income, in the end, the tax should be more or less the same.


However, there are exceptions to this relating to different provincial jurisdictions as well the time value of money.


Holding Corporation

A situation where using a corporation may provide a tax advantage is where a corporation invests business income taxed at the small business tax rate in passive investments. 


The idea is that the corporation will invest corporately taxed funds in passive assets before personal tax is applied.  


For example, a profitable operating company that has a surplus of funds may choose to invest these funds within a corporate structure rather than removing the funds from the corporation. 


Although the investment income earned, as noted above, would be taxed at a temporarily high rate in the company, personal taxation has been deferred.


This results in the business owner having more funds to invest upfront. Although the investment income may be taxed at a high rate, the personal tax deferral may provide an overall benefit.


This is perhaps a lengthy topic to discuss in detail, and future articles will aim to cover various aspects of it.  


It is also important to understand that the purpose of this article is to convey general concepts. There are many circumstances where it may or may not make sense to use a corporation for investment purposes. 


We assist clients by taking the time to review their personal and corporate structure as well as their goals, and along with their investment advisor, help them refine their business structures.  



It is our firm’s opinion that the decision to incorporate should be made carefully after considering the overall purpose for incorporation and whether it makes sense from a financial and operational perspective.  

We specialize in Corporate Taxation and take pride in operating with a high level of integrity. To stay up to date on taxation on investment income and future blog posts – follow us on LinkedIn and Facebook. Are you looking to obtain our services? Contact us today!