How does the Interest income get taxed inside a corporation?
Having a GIC or interest genreating income inside a corporation is always a great idea. The simple reason is taxation.
Before we jump into taxation of interest income inside a corporation, one should also be aware of how RTDOH works. RTDOH is refundable dividend tax on hand. The tax rate paid by the corporations on investment income is significantly higher than rate paid on business income, and generally higher than top marginal rate for individuals. In Alberta, the tax rate for investment income is 46.67%, where RTDOH credit of 30.67% is available and may be refunded to the corporation on the basis of $1 for every $2.61 of taxable dividend paid.
Interest income earned in the corporation: $1,000
Corporate Tax 46.67%: $467
RDTOH : $307
Available for Dividend: $840
Tax Payable by corporation: $160
Tax payable by an Individual on dividends: $355
Total Individual and corporate tax: $160+$355 = $515
Tax at top marginal rate if the interest is received by that individual directly will be $480.
Here, we can see that a corporation will pay higher taxes as compared to individuals on the investment income. No doubt, its a very safe investment, however, it should match your investment objectives.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.