When it comes to managing your finances within a corporation, it’s essential to consider the tax implications, especially when dealing with interest income. Interest-generating investments, such as Guaranteed Investment Certificates (GICs), can be a smart choice when handled correctly.
Before we delve into the specifics of interest income taxation within a corporation, it’s crucial to grasp the concept of RTDOH (Refundable Dividend Tax on Hand). This factor plays a significant role in the tax equation. But even before that let’s understand what is a private corporation, its structure and benefits.
What is a private corporation?
A private corporation, also known as a privately held company, is a business entity that is owned and operated by a relatively small group of individuals or a single entity. Unlike publicly traded companies, which sell shares of stock to the general public, private corporations have a limited number of shareholders, often consisting of the company’s founders, key investors, or a select group of stakeholders.
What is the structure of a private corporation:
Private corporations can take various forms, but one of the most common is the Limited Liability Company (LLC) or a closely held corporation. These structures offer key advantages, such as limited liability protection, flexibility in management, and tax benefits.
What are the benefits of private corporations?
Private corporations offer several advantages, including:
- Limited liability: Shareholders’ personal assets are protected from the company’s debts and liabilities, limiting their financial risk to their investment in the business.
- Control: Owners have a higher degree of control over the company’s operations, decision-making, and strategic direction.
- Privacy: Private corporations enjoy greater privacy, as they are not required to disclose financial information or other details to the public.
- Tax benefits: Private corporations may have access to various tax benefits such as Small business deduction, capital gains exemption, depending on their structure and location.
- Flexibility: They can adapt quickly to changing market conditions and implement strategies without the need for public shareholder approval.
How the passive income in a private corporation is taxed?
The tax rate corporations pay on investment income is notably higher than the rate applied to business income. In many cases, it even surpasses the top marginal rate for individuals. In Alberta, for example, the tax rate for investment income stands at 46.67%. However, corporations can benefit from the RTDOH credit of 30.67%, which is refundable to the corporation. This credit allows a refund of $1 for every $2.61 of taxable dividends paid.
Now, let’s break down the taxation process of interest income within a corporation:
If this $1000 of interested income from a GIC is retained in the corporation.
- Interest income earned in the corporation: $1000
- Corporate tax at 46.67%(Alberta) if the income is retained in the corporaton: $467
- Available for dividend or investment in the corporation: $1000-$467 = $533
If this $1000 of interested income from a GIC is not retained in the corporation and paid in the same year to the shareholder.
- Interest income earned in the corporation: $1000
- Non refundable Tax payable by corporation: $160
- Available for dividend: $840
- Tax payable by an individual on dividends of $840: $355
- RTDOH (Refundable dividend tax on hand): $307
Total individual and corporate tax: $160 (Corporation) + $355 (Individual) = $515
If these funds would have been invested personally in AB. With top marginal tax rates the total tax would be $480. When compounded the difference between $515 (corporaely) & $480 (individualy) could make a huge impact in the overall financial situation. To put this into perspective, if an individual received the interest directly, they would pay tax at the top marginal rate, which amounts to $480.
In this scenario, it’s evident that a corporation pays higher taxes on investment income compared to an individual. While interest-generating investments are considered safe, it’s essential to align them with your investment objectives.
To make informed financial decisions and optimize your tax strategy, it’s advisable to consult with a financial advisor or tax expert. Maximizing returns within a corporation requires a thorough understanding of tax intricacies, ensuring your wealth works for you efficiently. So call us today at (587) 718-8001 and schedule a consultation.
Important : 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.