Corporate Investment Income

• Author: Vern Krishna
• Profession: Professor of Common Law, University of Ottawa Barrister at Law
• Pages: 452-465

452

CHAPTER 18

CORPORATE

INVESTMENT INCOME

A. GENERAL COMMENT

The corporate tax on investment income depends upon the ty pe of corpor-

ation. Public corporations pay tax at norm al rates. The taxation of income

by a private corporation earns depends upon the source of its income.

B. TAX OBJECTIVES

The rules in respect of the taxation of corporate investment income

serve two objectives: (1) to “integrate” the amount of tax that a cor-

poration pays on its investment income with the tax that its individual

shareholders pay; and (2) to discourage individuals from deferring tax

by placing their investments in private holding companies.

“Integration” means that an indiv idual should pay the same amount

of tax on investment income, regardless of whether she earns the in-

come personally or indirectly through a corporation. We achieve inte-

gration by synchronizing the corporate tax rate with the effective rate

of tax that an individual pays on corporate investment income.

We implement the second objective by initially taxing corporate

investment income at a high rate to prevent tax deferral. Thus, we tax

the income (other than taxable dividends) that a Canadian-controlled

private corporation earns at the full corporate rate. Then, we refund a

portion of the tax to the corp oration when it pays out taxable dividends