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I am trying to figure out whether it would be beneficial for me to convert my sole-proprietorship to a corporation. In doing my research, I need to figure out how corporations get taxed on dividends they receive from other companies.

I found a lot of online resources discussing how to calculate taxes on dividends paid out by a corporation to an individual. Example: http://www.taxtips.ca/taxrates/qc.htm lists the marginal tax rate an individual must pay on eligible and non-eligible dividends.

How does one calculate the taxes that must be paid by a corporation on dividends it receives? Are they taxed at the same rate as individuals?

  • 1
    This doesn't seem like a personal finance question (corporate person-hood aside) – JohnFx Feb 18 '15 at 21:19
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    @JohnFx I believe this question is covered by money.stackexchange.com/help/on-topic section "When to incorporate to protect your work or assets". I've updated the question to clarify why I need this information (why it is on-topic). – Gili Feb 18 '15 at 22:27
  • What kind of business do you envision doing where your corporation would receive dividends from other corporations? Would your corporation be (a) a holding company, holding your interest in other private company shares, or (b) an investment corporation, holding dividend-producing listed shares of public companies? The treatment varies. – Chris W. Rea Feb 19 '15 at 15:46
  • @ChrisW.Rea I was thinking of a software development company that just so happens to invest its savings in dividend-yielding stocks. – Gili Feb 19 '15 at 18:36
  • @Gili Then you'll end up with two kinds of income: active business income, and investment business income. The tax treatment is different. I'll perhaps post an answer later, with more information. – Chris W. Rea Feb 19 '15 at 20:38
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Summary: The corporation pays 33.3% tax on dividends it receives and gets a tax refund at the same rate when it pays dividends out.

Details

According to http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/TaxRates/Federal-and-Provincial-Territorial-Tax-Rates-for-Income-Earned-CCPC-2015-Dec-31.pdf the corporate tax rates for 2015 are:

+---------------------------+--------------------------------------+-----------------------------------------------------+------------------------+-------------------+
|                           | Small Business Income up to $425,000 | Small Business Income between $425,000 and $500,000 | Active Business Income | Investment Income |
+---------------------------+--------------------------------------+-----------------------------------------------------+------------------------+-------------------+
| British Columbia          | 13.5%                                | 13.5%                                               | 26.0%                  | 45.7%             |
| Alberta                   | 14.0                                 | 14.0                                                | 25.0                   | 44.7              |
| Saskatchewan              | 13.0                                 | 13.0                                                | 27.0                   | 46.7              |
| Manitoba                  | 11.0                                 | 23.0                                                | 27.0                   | 46.7              |
| Ontario                   | 15.5                                 | 15.5                                                | 26.5                   | 46.2              |
| Quebec                    | 19.0                                 | 19.0                                                | 26.9                   | 46.6              |
| New Brunswick             | 15.0                                 | 15.0                                                | 27.0                   | 46.7              |
| Nova Scotia               | 14.0/27.0                            | 27.0                                                | 31.0                   | 50.7              |
| Prince Edward Island      | 15.5                                 | 15.5                                                | 31.0                   | 50.7              |
| Newfoundland and Labrador | 14.0                                 | 14.0                                                | 29.0                   | 48.7              |
| Yukon                     | 14.0                                 | 14.0                                                | 30.0                   | 49.7              |
| Northwest Territories     | 15.0                                 | 15.0                                                | 26.5                   | 46.2              |
| Nunavut                   | 15.0                                 | 15.0                                                | 27.0                   | 46.7              |
+---------------------------+--------------------------------------+-----------------------------------------------------+------------------------+-------------------+

According to page 3:

The federal and provincial tax rates shown in the tables apply to investment income earned by a CCPC, other than capital gains and dividends received from Canadian corporations. The rates that apply to capital gains are one-half of the rates shown in the tables. Dividends received from Canadian corporations are deductible in computing regular Part I tax, but may be subject to Part IV tax, calculated at a rate of 33 1/3%.

If I understand that correctly, this means that a Corporation in Quebec pays 46.6% on investment income other than capital gains and dividends, 23.3% on capital gains and 33.33% on dividends.

I'm marking this answer as community wiki so anyone can correct these numbers if they are incorrect.

UPDATE: According to http://www.pwc.com/ca/en/tax/publications/pwc-facts-figures-2014-07-en.pdf page 22 the tax rate on taxable dividends received from certain Canadian corporations is 33 1/3%. Further, this is refunded to the corporation through the "refundable dividend tax on hand" (RDTOH) mechanism at a rate of $1 for every $3 of taxable dividends paid.

My interpretation is as follows: if the corporation receives $100 of dividends from another company, it pays $33.33 tax. If that corporation then pays out $100 of dividends at a later time, it receives a tax refund of $33.33. Meaning, the original tax gets refunded.

Note the first line is for the 2015 tax year while the second link is for the 2014 tax year. The numbers might be a little different but the tax/refund process remains the same.

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