Corporate Investment Income

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

452

CH AP TER 18

COR POR ATE

INVESTMENT INCOME

A. GENER AL 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 earn s depends upon the source of its income.

B. TA X OBJECTIVES

The rules in respect of the t axation 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 t ax that its individual

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

by placing their investment s in private holding companies.

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

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

come personally or indirectly t hrough a corporation. We achieve inte-

gration by synchroni zing the corporate tax rate w ith 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 Can adian-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