Personal and Corporate Tax on Investment Income

Similar to climbing Mount Everest... the taxation of investment income is like making the final assent to the peak. You need to make sure you are well aware of all the rules and chart your course properly. Make sure to consult prior to making an investment to get a personalized assessment. The below information is designed to provide an overview of the taxation of investment income for people and corporations resident in Manitoba for 2019.

Personal Taxation

  • Dividends, Interest and Other Income – Dividends earned from Canadian public companies are taxed more attractively compared to dividend received from US public companies. A dividend from a large Canadian public company is subject to a 37.78% tax rate in the highest bracket whereas a dividend from a large US public company would be subject to a 50.4% tax rate in the highest bracket. You are normally required to pay withholding taxes of 15% in the US for which Canada gives you a 15% foreign non-business tax credit normally resulting in no additional taxation.

  • Capital Gains – Capital gains are 50% taxable whether from Canadian or US companies resulting in a tax rate of 25.2% (50.4%/2) in the highest bracket and are not subject to US withholdings. 

  • Dividends and Capital Gains within a Registered Plan (RRSP or TFSA) - There would be no difference between owning US and Canadian shares within registered plans (RRSP and TFSA) because income and capital gains are not taxed while holding the investments. There is even a treaty in place with the US that does not require you to pay withholdings in registered plans. 

The strategy that most people will take is to arrange their portfolio so that dividends, interest and other income is earned in a registered RRSP or TFSA and capital gains are earned in an unregistered account.

Corporate Taxation

  • Canadian Dividends – Dividends received by a Canadian Corporation from large Canadian public companies are typically eligible dividends and are subject to Part IV tax at a rate of 38.33%. In turn the Canadian Corporation will normally declare a dividend for the same amount as the one received. This triggers a refund of 38.33% resulting in no tax within the Corporation. The dividend is then normally declared as an eligible dividend and taxed personally at a rate of 37.78% in the highest bracket. 

  • US Dividends - Dividends received by a Canadian Corporation from large US public companies are taxed at a rate of 50.67%. You are normally required to pay withholdings of 15% to the United States for which Canada gives you a 15% foreign non-business tax credit resulting in no additional taxation. In turn, a dividend is normally declared by the corporation for the same amount as the dividend received. This triggers a refund of 30.67% resulting in a rate of 20% within the Corporation. The dividend is normally declared as a non-eligible dividend and taxed at a personal rate of 46.67% in the highest bracket. 

  • Interest and Other Investment Income – Interest received by a Canadian Corporation from bonds or savings deposits are taxed at a rate of 50.67%. In turn a dividend is normally declared by the corporation for the same amount as the interest received. This triggers a refund of 30.67% resulting in a tax rate of 20% within the Corporation. The dividend is normally declared as a non-eligible dividend and taxed at a personal rate of 46.67% in the highest bracket. 

  • Capital Gains – Capital gains are 50% taxable and 50% non-taxable whether on Canadian or US public companies resulting in a tax rate of 25.34% within the Corporation. In turn, a regular dividend is normally declared by the Corporation for the 50% taxable gain portion triggering a refund of 15.34% resulting in a tax rate of 10% within the Corporation. The dividend is normally non-eligible and taxed at a personal rate of 23.34% (@ 50%) in the highest bracket. The 50% non-taxable portion is withdrawn from the corporation as a capital dividend not drawing any tax. 

The most common strategy with a small corporation is to invest funds before higher personal taxes are incurred on withdrawal. This is beneficial if your business needs cash in the near term or you don’t have any personal RRSP contribution room left. However, be mindful that once investment income within a small corporation exceeds $50,000 there is an impact on the small business deduction increasing rates within the corporation.

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S2 Chartered Professional Accountant Ltd’s practice focuses on personal tax, estate & trust tax, corporate tax and financial statement compilation (notice to reader), audit and review services in and around Winnipeg, Manitoba.  Book your free consultation below to review your specific situation. 

Disclaimer

This post is intended to provide information of a general nature. Accordingly, the information in this document is not intended as a substitute for professional advice.  Before making any decision, you should consult a qualified, professional advisor.

 

Personal Tax, Corporate TaxScott Stockwell