Financial Post / Ted Rechtshaffen
Why you might be dropping the ball with your corporate investment account

Story by Ted Rechtshaffen

Once you understand how your passive income tax rate is structured, you will want to pay extra attention to it.

Many professionals and small business owners do a very poor job investing within their corporate investment accounts.

One reason is that they underestimate the tax rate by confusing active and passive tax rates.

For example, if you are in Ontario and qualify for the small business deduction, the tax rate on the first $500,000 of active business income is 11.2 per cent. In most provinces, the rate is between nine per cent and 11 per cent.

The key is that active business income is income that comes from the regular operation of your business. Even for the income above $500,000, the rate is mostly in the range of 26 per cent to 27 per cent.

Passive income, primarily the income earned from your corporate investment account, is another story. For this income, just to keep it simple, assume that it is taxed like personal income in the top tax bracket. In Ontario, passive interest income in a corporation would be taxed at 50.17 per cent. Not at 11.2 per cent. Not at 26.5 per cent. At 50.17 per cent.

If these were personal funds, you could potentially put them in a registered retirement savings plan (RRSP), tax-free savings account (TFSA) or registered education savings plan (RESP) or you can even gift the funds to your adult kids to put in their first home savings account before holding it personally in a taxable account. However, in your corporate account, whether it’s in a money market, guaranteed investment certificates (GICs), cash, foreign dividends or a bond fund, the income is being taxed at 50.17 per cent.

A capital gain has an effective tax rate of 25.09 per cent. Very importantly, a portion of that gain also gets added to the capital dividend account. This is a notional account tied to your taxes, but it is very important. You are able to withdraw the balance of your capital dividend account from the corporation tax free.

For example, if you bought $500,000 of Microsoft Corp. stock and sold it at $1 million, there would be $500,000 of capital gains. Half of that amount would be added to the capital dividend account and could be withdrawn tax free from the corporation.

Canadian dividends are complicated, but they are taxed at 38.33 per cent. The taxes owing on the dividends get added to a notional tax account called the refundable dividend tax on hand (RDTOH) account. Ultimately, if the RDTOH is fully refunded, it would get the corporate tax rate down to closer to zero per cent. However, it isn’t that simple, and you might not fully use the RDTOH for many years for a variety of reasons.

The other big complicator is that if your passive income is more than $50,000 in a year, it will negatively impact the amount of active business income you can have taxed at the low 11.2 per cent tax rate.

The bottom line is that once you understand that your passive income tax rate is structured this way, you will want to pay extra attention to it.

Many corporations have inordinately high weightings in cash, money markets and GICs, leading to the highest tax rates.

As a business owner myself, I understand why this can happen. Business is unpredictable. You have seen good times and bad times, and in bad times, you want to have easily accessible cash. Some people also feel that their business has risks, so they want to keep the corporate investment account low risk.

These feelings are understandable, but they end up leading to sizable amounts of interest income taxed at 50.17 per cent. Of course, the high tax rate isn’t the only problem. These investments also fall into the category with the worst long-term returns over virtually any period. The reason is that their low-risk nature is ultimately closely connected to low returns.

In many cases, a good investment manager or accountant will review the cash flow for the business along with the liquidity of investments and be able to determine a more efficient level of cash and near cash for the corporate account.

Once the assets in your corporate investment account become larger than a reasonable cash cushion, it is time to make that money work smarter and harder for you.

Another reason why your corporate investments aren’t working is that many great strategies for them are not known or understood.

The first of these strategies is to invest in areas that will generate little or no income. This can include individual stocks with no dividends as well as many corporate-class exchange-traded funds structured for either return of capital or no income.

Many corporate investment account owners are not looking for income from these accounts in the first place, so investing without income can lead to significant tax savings over time. The other major benefit is that with most of these investments, when you sell, you will often create capital dividends that grow the capital dividend account and allow for tax-free withdrawals.

The second strategy is the use of life insurance for corporate investment accounts. Quite simply, this is the best tax strategy available in certain circumstances. It is often for estate planning, but depending on the situation and your age, it can also be a retirement planning strategy.

Other strategies include the use of flow-through shares for high-income corporations, individual pension plans (IPPs) to expand pension room beyond your RRSPs and planning dividend payouts and employment of family members at reasonable rates.

The reality is that corporate taxes are more complicated than personal taxes, which often leads to missed opportunities to significantly lower your overall taxes, saving you meaningful dollars over time.

Ted Rechtshaffen, MBA, CFP, CIM, is president, portfolio manager and financial planner at TriDelta Private Wealth, a boutique wealth management firm focusing on investment counselling and high-net-worth financial planning. You can check out their 2026 Canadian Retirement Income Guide through www.tridelta.ca

Reproduced from Financial Post, September 16, 2026.