Canada: Budget 2018 – Legislation Affecting Private Corporations – The Passive Investment Income Measures

Last Updated: March 2 2018
Article by Mike Harris and MaryAnne Loney

On February 27, 2018 the Government of Canada presented its 2018 budget. Along with spending plans, the Government also presented the next round of legislation to address their concerns with perceived advantages of using private corporations. As anticipated, the 2018 Budget includes provisions to address the Government's concerns with "passive investments" in a corporation.

Tax changes to address "advantages" of passive investments in private corporations

The Government has introduced legislation which would make two significant changes to reduce the advantages of investing in passive investments in a corporation:

  • The small business deduction ("SBD") will be reduced when an associated group of corporations is earning more than $50,000 of passive investment income and will be eliminated after $150,000.
  • There will be an eligible and ineligible refundable tax pool ("RDTOH") which will reduce the ability of a corporation to obtain a refund of RDTOH through paying eligible dividends.

Subject to some anti-avoidance provisions, both changes will apply starting in tax years that begin in 2019.

Reduction of SBD – New legislation

The normal tax rate for active business income earned by a private corporation is 27% in Alberta (all tax rates are combined Federal and Alberta provincial rates). The SBD allows active business income of up to $500,000 to be taxed at 12%. This allows a larger tax deferral while the earnings remain in the corporation. The policy behind this deferral is that it allows greater reinvestment in the small business. The Government was concerned that this deferral was often used instead to invest in passive investments.

There are already numerous limits to when a corporation qualifies for the small business deduction, and how much it qualifies for. Notably, "associated" corporations must share the SBD and the SBD is reduced when the "taxable capital employed in Canada" exceeds $10,000,000 (to fully eliminate it at $15,000,000).

The Government proposes to add an additional reduction mechanism, now reducing the SBD by the greater of the reduction for more than $10,000,000 of taxable capital employed in Canada or by $5 for every $1 of "adjusted aggregate investment income" ("AAII") above $50,000 within the associated group of corporations. This would result in the SBD being eliminated completely at $150,000 of AAII.

AAII is essentially aggregate investment income

  • less capital gains on capital assets used in the active business or a share of a connected corporation where substantially all the fair market value of its assets is attributable to assets used in an active business;
  • plus dividends from non-connected corporations; and
  • plus income from a life insurance policy that is not otherwise exempt.

Note, while the Government indicated in its October 2017 announcements that "all past investments and the income earned from those investments will be protected" there is nothing to suggest that investment income earned on current passive investments would be excluded from the definition of AAII (i.e. there are no grandfathering provisions for current passive investments).

Reduction of SBD – What it means

These measures will not impact corporations that are unable to claim the SBD or which do not have more than $50,000 of AAII.

However, for associated corporate groups earning more than $50,000 of AAII which were able to claim the full SBD, their SBD will be reduced and potentially eliminated.

This will reduce the tax deferral available as more business income will be taxed at 27% as opposed to the 12% SBD rate. Business income taxed at 27% results in an addition to the corporation's general rate income pool ("GRIP") which allows a corporation to pay eligible dividends (taxed at 31.71% top tax rate) as opposed to non-eligible dividends (41.64% top tax rate). However, this still results in an increase of net tax as the net effective tax rate of the combined SBD rate plus non-eligible dividends is 48.6% where the net effective tax rate of the combined general business rate plus eligible dividends is 50.1%.

RDTOH – New Legislation

Canadian-controlled private corporations are required to pay a refundable tax on most investment income, which includes items such as interest, capital gains, and dividends on marketable securities. The purpose of the refundable tax is to eliminate the incentive to make investments through holding corporations, by taxing the resulting income at a rate comparable to the highest personal tax rate. This refundable tax is either 30.67% or 38.33% depending on the type of investment income received, and is refundable by paying taxable dividends to individual shareholders. For every $100 of taxable dividends paid, $38.33 of refundable tax is recovered.

Currently, both eligible dividends and non-eligible dividends result in a recovery of refundable tax when paid. In the case of eligible dividends, this means that a $100 dividend results in $31.71 of tax at the top rate and recovers $38.33 of refundable tax, giving a net refund. A non-eligible dividend would result in $41.64 of tax and a $38.33 refund, giving a net tax liability.

Budget 2018 will change how refundable tax is recovered by creating two RDTOH pools. Most types of investment income earned after 2018 will give rise to a "non-eligible" refundable tax that can only be recovered by paying non-eligible dividends. Paying eligible dividends will no longer result in a refund of this "non-eligible" refundable tax. In contrast, eligible dividends received by a corporation and subject to Part IV Tax will give rise to an "eligible" refundable tax, which can be refunded by paying either eligible or non-eligible dividends.

As a transitional rule, a Canadian-controlled private corporation will have an opening "eligible" RDTOH equal to the lesser of its existing RDTOH or 38.33% of its GRIP balance. The balance (if any) of its RDTOH will become "non-eligible" RDTOH.

RDTOH – What it means

This change will impact taxpayers who own corporations that earn both investment income and active business income that generates GRIP (i.e. that does not qualify for the small business deduction). In these corporations, a decision will need to be made whether to pay eligible dividends (at a preferential tax rate) or non-eligible dividends (to recover the non-eligible refundable tax). Depending on the taxpayer's marginal tax rate, it may make sense to effectively abandon the refundable tax in the corporation as it will cost more to recover than the refund is worth.

Where all a corporation's active business income is eligible for the SBD these provisions will have no effect as such a corporation generally cannot pay eligible dividends in any event.


These proposed changes achieve the Government's stated purpose of reducing the advantages of investing business income in passive investments in a corporation if the corporation

  • earns more than $50,000 of AAII or
  • regularly pays eligible dividends.

The combination of these two new changes along with the "income sprinkling" provisions introduced in December will require most private corporations (or at least their accountants) to review their current tax plans.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions