Holding a passive investment portfolio inside a private corporation

The current system allows for a tax deferral of the individual tax payable if the shareholder leaves funds in the corporation for passive investment purposes instead of being distributed to the shareholders, through taxable dividends or salary, for the shareholders to invest personally.


As corporate tax rates on active income are lower than the marginal personal tax rate, when surplus funds are left in a private corporation, the tax that would have been payable upon distribution of the surplus to the shareholders can be deferred, resulting in the corporation having more capital to invest.

No specific measures are proposed and the government seeking consultation on an appropriate means of eliminating the tax-deferral advantage.  Implementation of a suggested system could be made in two general ways:


  • Apportionment method - this would involve tracking income used to acquire the passive investments, as well as the income that the investment generates. The source of the funds would determine the rate of tax to be applied on the investment income earned by such funds.
  • Elective method - would subject a private corporations to a default tax treatment, unless an election is made. There would be no tracking of income as under to apportionment method.


  1. Default method - subject the passive income to non-refundable taxes and when dividends are paid the dividends would be taxed as non-eligible dividends.
  2. Elective method - for corporations subject to the general tax rate on all or most of their income, an election could be made to have the additional non-refundable taxes apply to the passive income and treat the dividends as eligible dividends which have a higher dividend tax credit to the shareholder. The election however would remove a corporation's access to the small business rate.

For capital gains the 50% inclusion rate will continue to apply and will continue to be subject to the passive investment income taxes.  However, it is contemplated that the suggested new system would eliminate the non-taxable portion of the capital gains being added to the capital dividend account where the source of capital of the investments was income taxed at lower corporate tax rates.  The ability to distribute tax-free dividends to shareholders would be reduced.


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