Canada: Status Of Measures Targeting Private Corporations Following The 2018 Federal Budget

Last Updated: March 14 2018
Article by Jared A. Mackey, L. Alan Rautenberg and Darcy D. Moch

The Federal Budget, released February 27, 2018, has clarified federal plans to change the tax treatment of private corporations and represents a substantial retreat from proposals announced in July 2017. In July 2017, the government released a consultation paper and draft legislation which proposed to radically change the taxation of private corporations and their shareholders. The proposals were aimed at: (a) income splitting among family members; (b) passive investment income of private corporations; (c) use of the capital gains exemption by family members; and (d) realizing capital gains on private corporation shares instead of receiving dividends. The proposals were not well received in the small business sector.

In October 2017, the government announced that it would not move forward with proposed changes to limit access to the capital gains exemption or changes relating to capital gains. In December 2017, the government released revised draft legislation to simplify proposed income splitting rules.

The budget reveals the government's intended approach to passive investment income earned by private corporations. The government has abandoned its proposal to levy tax on investment income at rates over 70 percent. Instead, the budget proposes two measures. The first will limit access to the preferential small business tax rate. The second will limit a modest tax-deferral advantage that may arise regarding refundable taxes on investment income. Both measures will apply to taxation years beginning after 2018.

Limiting Access to the Small Business Tax Rate

The first measure will reduce or eliminate the small business deduction if a Canadian-controlled private corporation (CCPC) has significant investment income. According to the government, about 3 percent of CCPCs claiming the small business tax rate will be affected by the measure.

A CCPC is generally eligible for the preferential small business tax rate on its first $500,000 of active business income. Under the budget proposal, if a CCPC earns more than $50,000 of passive investment income in a year, the income eligible for the small business tax rate will be reduced by $5 for every $1 of investment income above the $50,000 threshold. Once a CCPC has more than $150,000 of investment income, it will lose the small business tax rate entirely. In contrast to the July 2017 proposals, private corporations only taxable at general corporate rates will not be affected.

A CCPC's investment income for the new measure will exclude capital gains on capital assets used in an active business, and capital gains on shares of connected corporations that meet an active business asset test. Portfolio dividends and income from a life insurance policy might reduce the small business deduction.

Limiting Access to Refundable Taxes

The budget's second measure limits the ability of a CCPC to access refundable taxes when paying eligible dividends.

The Canadian tax system integrates corporate income with dividends paid to shareholders, meaning that income earned by a corporation and distributed to a shareholder is taxed at about the same rate as income earned directly by an individual. The tax system provides nearly full integration for active business income taxed at the general corporate rate and active business income taxed at the small business rate, by permitting active business income taxed at the higher general corporate rate to be distributed as eligible dividends that are taxable to a recipient at a lower rate, and requiring that active business income taxed at the preferential small business rate be distributed as non-eligible dividends, taxable to the recipient at a higher rate.

To eliminate any deferral benefit from earning investment income in a private corporation, the system levies an additional refundable tax on such income. A portion of the corporate tax payable is refundable through the "refundable dividend tax on hand" (RDTOH) account, which provides the corporation with a tax refund when dividends are paid to shareholders. Ordinarily, investment income would be distributed as a non-eligible dividend, taxable to the recipient at a rate higher than an eligible dividend. However, a corporation that earns active business income taxed at the general corporate rate can pay eligible dividends and receive an RDTOH refund. In these circumstances, a modest tax-deferral benefit arises, since the corporation receives an RDTOH refund and the shareholder receiving the eligible dividend is taxed at lower rates.

The second measure targets this deferral advantage by providing that RDTOH generated from investment income can be refunded only if a non-eligible dividend is paid. The purpose of the measure is "to better align the refund of taxes paid on passive income with the payment of dividends sourced from passive income." The budget proposes the creation of an "eligible RDTOH" account, which will include refundable tax paid on eligible dividends received by a corporation, and will be refundable on the payment of an eligible dividend. The current RDTOH account will become a "non-eligible RDTOH" account and will include refundable taxes paid on investment income other than eligible dividends.

Under the proposals, a CCPC can only obtain a refund from its "non-eligible RDTOH" account by paying a non-eligible dividend. In contrast, a CCPC can obtain a refund from its "eligible RDTOH" by paying any taxable dividend (eligible or non-eligible). Any non-eligible dividend, however, must first obtain a refund from "non-eligible RDTOH".

Under transitional rules, a CCPC will have an opening "eligible RDTOH" account equal to the lesser of its existing RDTOH account or 38.33 percent of its "general rate income pool", representing income taxed at the higher general corporate rate. The balance of its existing RDTOH will be included in its "non-eligible RDTOH" account. As a result, CCPCs may generally continue to receive a refund of taxes paid on investment income earned prior to 2019 through distributing eligible dividends. The transitional period before the new regime comes into effect may provide planning opportunities.

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.

Jared A. Mackey
Similar Articles
Relevancy Powered by MondaqAI
Minden Gross LLP
Collins Barrow National Incorporated
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Minden Gross LLP
Collins Barrow National Incorporated
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must 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