Substantive CCPCs: Changes to Tax on Investment Income

  • June 13, 2022
  • Joelle Kabouchi, Senior Associate, Borden Ladner Gervais LLP, Ari Derohanesian, Summer Student, Borden Ladner Gervais LLP

Substantive CCPCs: Changes to Tax on Investment Income

The 2022 Federal Budget (“Budget 2022”), tabled on April 7, 2022, proposes the introduction of the substantive Canadian-controlled private corporation rules. The change provides that non-Canadian-controlled private corporations that meet the definition of a “substantive CCPC” will also be subject to the refundable tax on investment income regime that Canadian-controlled private corporations (“CCPCs”) are subject to.[1]

Budget 2022 indicates that this measure is expected to increase federal revenues by $4.2 billion over five years starting in 2022-23.

Current Rules for Investment Income

Canadian income tax rules attempt to create tax neutrality between income earned by a Canadian-resident individual directly and income earned by a CCPC owned by that Canadian resident individual. Generally, investment income earned by a CCPC is subject to additional refundable tax of 10 2/3 % (“ART”), which is ultimately refundable when the CCPC pays out taxable dividends to shareholders. Investment income that may be subject to ART includes interest, royalties, capital gains, rent, and foreign accrual property income. Of note, investment income includes income earned on the sale of securities and real property held on capital account.

The purpose of the ART that applies to CCPCs is to make a Canadian resident paying taxes at a marginal tax rate above the corporate income tax rate (26.5% in Ontario) neutral between earning investment income personally or through a newly formed CCPC. The combined tax rate on investment income earned by a CCPC due to the ART is 50.2%, which should approximate the highest marginal tax rate. For example, if an individual is paying tax at a marginal rate of, say, 40%, they would be reluctant to incorporate their investment income, because the ART would bump their tax rate up from 40% to 50.2%. Without the ART, they may decide to incorporate because the corporate income tax rate is much lower at 26.5%.