A corporation’s investment income is generally taxable at between about 47% and about 55%, depending on the corporation’s province of residence. This includes interest, foreign dividends and rental income.
Canadian dividend income earned by a corporation is generally subject to about 38% tax, although dividends paid between two related corporations may be tax-free (i.e. paying dividends from an operating company to a holding company).
For a corporation, capital gains are 50% tax-free—just as they are for individuals—such that corporate tax on capital gains ranges from about 23% to about 27%.
Rental income is fully taxable personally and corporately at regular tax rates. So, this means 31% for an Ontario resident with $100,000 of income, for example, and between 47% and 55% corporately depending on the corporation’s province or territory of residence.
The caveat is that only net rental income is taxable. A rental property investor can deduct eligible rental expenses including, but not limited to, mortgage interest, property tax, insurance, utilities, condo fees, professional fees, repairs and related costs.
Income in an RRSP
Registered retirement savings plan (RRSP) accounts are tax-deferred with tax payable on withdrawals. However, there are tax implications to owning investments in your RRSP and other registered retirement accounts.
Foreign dividends are generally subject to withholding tax before being paid into your account or an RRSP investment at rates ranging from 15% to 30% (in the case of a mutual fund or ETF). In a taxable account, this withholding tax does not matter as much because you generally claim a foreign tax credit to avoid double taxation. In an RRSP, the foreign withholding tax is a direct reduction in your investment return with no way to recover the tax. This does not mean you should avoid foreign investments in your RRSP. It is simply a cost of diversifying your retirement accounts.
One exception is U.S. dividends. If you buy U.S. stocks or U.S.-listed ETFs that owned U.S, stocks, there is no withholding tax on dividends paid in your RRSP. If you own an ETF that owns U.S. stocks that trades on a Canadian stock exchange, or you own a Canadian mutual fund that owns U.S. stocks, there will be 15% withholding tax on the dividends of the underlying stocks before they are paid into the fund.