What this module covers
Tax treatment changes what an investor keeps from a private investment. As a hypothetical: a 10% yield taxed as interest at a 50% marginal rate leaves 5% after tax, while a return taxed more favourably leaves more. This module describes the Canadian considerations that most often decide that difference, and the questions they raise.
Treatment depends on each investor's circumstances, and the rules change; a tax adviser applies them to a particular case. What follows describes how the main rules work, so that the right questions can be put to a tax professional with the relevant experience.
- Investing personally or through a holding company
- Registered accounts
- Partnership income, the T5013 slip and adjusted cost base
- Flow-through shares and the Critical Mineral Exploration Tax Credit
- The risks flow-through tax benefits do not remove
- Investing in funds outside Canada
- Recurring tax errors, and the advisers involved
Investing personally or through a holding company
The first structural question is who makes the investment: the individual, or a corporation the individual owns.
Many business owners use a holding company. Income is earned in the operating business. The owner draws a salary, and profits beyond what the owner needs are kept inside the corporate group and invested from a holding company.
The appeal is deferral. Money retained in a corporation has borne corporate tax but not yet personal tax. Investing it from the corporation puts the larger, pre-personal-tax amount to work, and personal tax is deferred until money is eventually paid out to the owner.
Corporate investing is not automatically better, and the rules on passive income have made the comparison harder:
- Passive income and the small business deduction. When a corporation, together with its associated corporations, earns more than $50,000 of passive investment income in a year, the small business deduction available to the group in the following year begins to shrink. Investment income held in the corporation can therefore raise the tax rate on the operating business's active income.
- Refundable dividend tax on hand (RDTOH). Part of the tax a corporation pays on investment income is refunded when the corporation pays taxable dividends to its shareholders. The RDTOH rules govern how much is refunded and what kind of dividend reaches the shareholder, which affects the personal tax paid at the end.
The result is case by case. For some owners, investing through the corporation is clearly better. For others, once the passive income rules and the added complexity are counted, it is a wash or worse. The comparison is usually modelled with an accountant for the specific case rather than assumed.