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How Business Owners can increase their retirement savings by investing within their corporation.

A great strategy that many owners of Canadian-controlled private corporation (CCPC) use to build up retirement savings; is to invest within their corporation using the benefit of the tax deferral between their personal income tax rate and the small business income tax rate. 

Why invest with your CCPS?

Investing within your CCPC offers the potential to defer the taxation vs simply paying out the income to yourself and then investing the after-tax capital. The reason is; if your company is earning active business income, you should be able to claim the small business deduction (SBD) which allows a Canadian-controlled private corporation (CCPC) to pay a lower tax rate to a $500,000 threshold in most provinces, and this tax rate could be lower than your personal tax rate.

This strategy has become  more complex recently with the introduction of the new passive investment rules in 2018, but it can be managed.

Active Business Income

In Ontario, the Small Business Tax rate is 12.20%. If you do not require all of the after-tax profits from your company for current lifestyle, you may have the opportunity for a significant tax deferral. This is the dollar value difference between leaving the money in your corporation and paying the money out of your corporation to yourself.

The savings is the difference between the top personal tax rate in Ontario of 53.53% and the 12.20% corporate tax rate, about a 41.33% tax deferral.

Example – say your company’s business income was $450,000, you paid yourself $300,000 for lifestyle, and you had a surplus of $150,000 that you were considering investing within your corporation or taking as income, pay the tax, and then investing. The difference between the two options are:

  • Withdraw the additional $150,000 from the company, pay the tax (53.53%) and invest, leaving you $69,705 to invest after personal tax
  • Leave the $150,000 in the company, pay the corporate tax (12.20%) and then invest, which would leave you with $131,700 to invest after corporate tax
  • The difference is the tax deferral of 41.33% between your personal and corporate tax rate ($61,995)

You can see that if you did this over numerous years, you could dramatically increase your savings.

Taxation of Passive Income within your CCPC

There is a difference between earning active business income, and passive business income within your corporation. Active business income is income from your on-going operations, and passive income is income generated from your investments.

Under the theory of integration, there should be no income tax advantage on the income earned from your investments within your corporation and flowing them out to you personally vs earning the investment income individually.

Integration of Taxes between your CCPC and personal income:

The income you earn on investments are taxed within your CCPC and then again when withdrawn when paid to you as a dividend from your company.  To keep the level of overall taxation approximately the same, there are two mechanisms to accomplish this, the Refundable Dividend Tax on Hand and the Capital Dividend Account. These are notational accounts, that your accountant will track for you.

RDTOH – as non-eligible dividends are paid to you, the corporation is paid back the some of the tax it has paid, and the Corporate Dividend Account is a tax free amount built up by the non-taxable amounts of capital gains. If you wish to know the specifics, please contact your accountant.

The tax rules do not allow a tax deferral on investment income and as a result, the investment income earned within a corporation is not eligible for the small business deduction. Instead, the corporate tax rate on investment income is much higher than active business income. The government does not want taxpayers gaining a tax deferral on investment income, the way they do on business income.   

Investing within a Corporation (Passive Income)

If you build up an investment portfolio within your corporation, using the advantage of the tax deferral, the tax implications will depend on the type of income the portfolio earns. Currently, in Ontario the flat tax effective income from most tax effective to least is:

  • Capital Gains — Est 25.1 % tax
  • Canadian Eligible Dividend Income – Est 38.3 % tax
  • Interest Income – Est 50.20 % tax

Source: Mackenzie Financial: 2020 Income in a Corporation

To reduce your tax burden, you want investments that generates capital gains and dividend income and avoid interest income. 

The combined personal and corporate tax rate when the income is paid out to you as non-eligible dividends at the top marginal tax rate is:

  • Capital Gains — Est 29.0 % tax
  • Canadian Eligible Dividend Income – max 39.3 % tax
  • Interest Income – Est 57.90% tax

Source Mackenzie Financial: 2020 Income in a Corporation

Passive Investment Rule Changes 2018

Starting in 2019, there were changes to the passive income rules, called the small business limit reduction.  Once your passive income exceeds $50,000 year, the incorporated business starts to lose the small business tax rate for active business income under $500,000/year.  For every $1 of passive income over $50,000/year, the business will lose $5 of the $500,000 small business limit. Once your passive income is over $150,000, you no longer have access to the small business rate on Active Business Income. (be sure to consult your accountant about this)

Based on the passive investment rules, you will want tax effective investments to preserve your access to the tax rate under the $500,000 small business limit.

These tax rules and calculations are complex, and you will want to make sure you work hand in hand with your accountant when you invest with-in your CCPC.

Corporate Class Mutual Funds – A solution

Since you want to avoid interest income in your CCPC if possible, Corporate Class Mutual Funds can be used to reduce your overall tax burden. These types of mutual funds allow the CCPC to invest in investments that generate capital gains and dividend income and avoid interest income.   

Corporate class funds are different than a regular trust version of a mutual fund. They are set up as a corporation. The main advantages of corporate class funds are:

  • They can only generate capital gains or dividend income. You can have a globally diversified portfolio with fixed income investments.
  • Taxable distributions tend to be lower than the trust version of the same fund.   
  • Many investment companies have high net worth programs with lower MERs and have structures to make the management fees tax deductible.
  • They help to lower your overall tax rate to avoid the new passive investment income limit rules.

Comparison of Taxable Income


Trust Mutual Funds/Stocks/Bonds/ETFs

Corporate Class Mutual Funds

Interest Income Distributions[1]


Taxed as capital gain (possible deferred)

Foreign Income Distributions


Taxed as capital gain (possible deferred)

Canadian Dividend Distributions



Canadian Gain Distributions


Yes -potential less than Trust Version of same fund

Return of Capital Distributions



Deductibility of Fees



Note: 1. Unlike Mutual Fund Trusts, mutual fund corporations cannot distribute interest and foreign income under applicable tax laws.

The Capital Dividend Account Advantage

Since Corporate Class Funds pay out primarily capital gains, owners of CCPC can also take advantage of the Capital Dividend Account. (CDA).  As mentioned prior, the capital dividend account is a notional account that tracks the various tax-free amounts accumulated by the corporation, which can eventually be paid out as tax-free dividends.

Due to the concept of Integration discussed earlier, 50% of the capital gains that are not taxable from corporate class funds are added to the CDA – which can eventually be paid out tax-free to the shareholder. 


A great strategy to build additional savings for retirement is investing within a Canadian-controlled private company (CCPC), using the significant tax deferral mechanism. At the top personal tax rate, you could have a tax deferral of 41.33%.

The use of Corporate Class Funds within this strategy can be a powerful benefit to reduce the current tax burden with your corporation, build up your Corporate Dividend Account, and help protect your small business tax deduction.

Be sure to review investing within your Corporation using Corporate Class funds with your financial advisor and accountant to determine if can be a benefit to your situation and retirement planning.




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