Corporate tax on investment income: 38.67% federal, 30.67% refundable

How is each type of investment income taxed inside a CCPC?

A CCPC pays full Part I tax on property income and on the taxable half of capital gains, then recovers most of the federal part through RDTOH when it pays taxable dividends. Dividends from other Canadian corporations skip Part I tax through the s.112 deduction laws-lois.justice.gc.ca and pay Part IV tax instead laws-lois.justice.gc.ca.

Aggregate investment income in s.129(4) is property income plus taxable capital gains net of allowable capital losses. It leaves out dividends deducted in computing taxable income and income from property used or held principally to earn active business income laws-lois.justice.gc.ca. Interest counts as it accrues: a corporation includes interest that accrued to the end of its year, received or not laws-lois.justice.gc.ca.

A payer is connected when your client's company controls it, or holds more than 10% of the voting shares and more than 10% of the value laws-lois.justice.gc.ca. For the Part IV mechanics see Part IV tax and intercorporate dividends.

What is the combined rate on investment income in each province for 2026?

The federal 38 2/3% is built from the 38% basic rate less the 10% provincial abatement, which leaves 28% canada.ca. A CCPC's aggregate investment income is taken out of full rate taxable income, so the 13% general rate reduction never reaches it laws-lois.justice.gc.ca. Section 123.3 then adds a refundable 10 2/3% laws-lois.justice.gc.ca. The small business deduction only covers active business income, so the province charges its general rate laws-lois.justice.gc.ca.

The provincial rates come from the CRA table, which also notes that Prince Edward Island's general rate fell from 16% to 15% on July 1, 2025 canada.ca, so a PEI year that straddles that date blends the two. Alberta collects its own tax at 8% alberta.ca. Quebec also sets its own rate; see corporate tax rates by province.

Permanent tax is the federal 8% left after the refund plus the full provincial rate. The provincial part is never refunded.

What do $1,000 of interest, a gain and a public company dividend cost an Ontario CCPC?

Your client's Ontario CCPC earns $1,000 of interest, realizes a $1,000 capital gain on an ETF, and receives a $1,000 eligible dividend from a Canadian public company. It has no active business income and no loss carryforwards.

The federal $386.67 on the interest is $380 at 38%, less the $100 abatement, plus $106.67 of additional refundable tax. To recover the $460 of non eligible RDTOH from the first two columns, the company pays $1,200 of non eligible dividends, since the refund is 38 1/3% of taxable dividends paid laws-lois.justice.gc.ca. The untaxed $500 of the gain goes to the capital dividend account under s.89(1) laws-lois.justice.gc.ca and can be paid out as a tax free capital dividend; see capital dividend account.

The dividend's $383.33 sits in eligible RDTOH. An eligible dividend of $1,000 releases it, or a non eligible dividend reaches it once non eligible RDTOH is empty. The pool rules are on our RDTOH page.

When less than 30 2/3% comes back

The 10 2/3% tax applies to the lesser of aggregate investment income and taxable income above the small business amounts laws-lois.justice.gc.ca. The refundable addition under s.129(4) has a similar taxable income cap and is also limited to Part I tax payable laws-lois.justice.gc.ca. So when a non capital loss carryforward absorbs the investment income, less tax is paid and less goes into RDTOH.

A net capital loss carryforward deducted under s.111(1)(b) reduces aggregate investment income directly, because the s.129(4) definition subtracts it from the year's taxable capital gains laws-lois.justice.gc.ca. See net capital loss carryover.

Foreign income cuts the refund where the foreign tax credit is high. The 30 2/3% addition is reduced by the amount by which the s.126(1) deduction exceeds 8% of foreign investment income laws-lois.justice.gc.ca. Foreign withholding above that level is a permanent cost. See foreign tax credit.

The refund also needs action. The company must pay taxable dividends, and the T2 must be filed within three years after the year end or the refund for that year is lost laws-lois.justice.gc.ca. Capital dividends and capital gains dividends don't qualify for the refund canada.ca.

Investment income also shrinks next year's small business limit

Under s.125(5.1)(b), the $500,000 business limit drops by $5 for every $1 of adjusted aggregate investment income over $50,000, counted across the associated group for taxation years that ended in the preceding calendar year laws-lois.justice.gc.ca. At $150,000 the limit is gone. That cost lands on active business income, which then pays the general rate federally.

So a holding company earning $100,000 of interest pays 38 2/3% federal on it this year and cuts the operating company's federal limit to $250,000 next year. Ontario and New Brunswick don't follow the grind provincially. The full calculation is on our passive income SBD grind page, and the T2 form is Schedule 7.

Schedule 7 carries aggregate investment income to line 440 and foreign investment income to line 445 of the T2, and part 2 of it computes adjusted aggregate investment income canada.ca. Part IV tax goes on line 712 from Schedule 3 canada.ca.