Corporate Tax Flow: How Income Reaches Shareholders

Why This Matters

When you invest inside a corporation, the type of income your investments generate affects two things:

1. How much cash stays in the corporation to reinvest (tax deferral)
2. How much after-tax cash reaches you as the shareholder (bottom-line outcome)

This page shows exactly how $1,000 of investment income flows through a Québec or Ontario corporation and reaches shareholders. The calculations assume the top marginal tax bracket (income over $253,000) and use 2025 Québec tax rates.

The Tax Flow Calculator

Understanding Tax Deferral: Why Step 3 Matters

Step 3 (Net Cash in Corporation) is where tax deferral happens. This is the cash that stays in your corporation after corporate tax is paid, available for reinvestment. This principle applies to incorporated business owners in both Québec and Ontario, though exact dollar amounts may vary slightly due to provincial rate differences.

The Timing Difference: When Tax Is Paid

The greatest tax deferral effect with capital gains comes from when the tax is paid, not just how much.

• Interest and dividends: Taxed as they are received. Every year, you pay corporate tax on interest and dividend income, reducing the cash available to reinvest.
• Capital gains: Taxed only when you sell the investment (disposition). While you hold the investment, no tax is paid. The full value compounds tax-free until you realize the gain.

This means with capital gains, you control the timing. You can hold investments for years or decades, letting the full pre-tax value compound. With interest and dividends, tax is paid annually, reducing the amount available to compound each year.

Interest Income: Less Cash to Reinvest

With interest income, $1,000 becomes $498.30 after corporate tax. This is the cash available to reinvest. The corporation keeps less because interest is fully taxable at high corporate rates, and this tax is paid each year as interest is received.

Capital Gains: More Cash to Reinvest

With capital gains, $1,000 becomes $666.55 after corporate tax (on the taxable portion). This is more cash available to reinvest. But the bigger advantage is timing: you only pay this tax when you sell the investment. Until then, the full $1,000 (and any growth) compounds without annual tax drag.

The tax deferral advantage: When more cash stays in the corporation, it can compound at pre-personal-tax rates. Over 10, 20, or 30 years, this difference adds up. With capital gains, you also defer the tax payment itself, allowing the full investment value to grow until you choose to realize it.

After-Tax Outcomes: What Actually Reaches Shareholders

Tax deferral matters, but the bottom line is what reaches shareholders after all taxes are paid.

The CDA Advantage

Capital gains provide a unique advantage through the Capital Dividend Account (CDA). One-third of every capital gain ($333.33 out of $1,000) can flow to shareholders tax-free. This is money that bypasses personal tax entirely.

Bottom-Line Comparison

• Interest Income: $413.00 reaches shareholders (41.3% kept)
• Eligible Dividends: $599.00 reaches shareholders (59.9% kept)
• Capital Gains: $609.00 reaches shareholders (60.9% kept)

Capital gains provide the best after-tax outcome because:

1. More cash stays in the corporation to reinvest (tax deferral)
2. One-third flows tax-free through the CDA
3. The remaining taxable portion is taxed at non-eligible dividend rates

Strategic Implications

For Long-Term Investors

If you're building wealth over decades, capital gains offer:

• Tax deferral: More cash stays in the corporation longer
• Control: You choose when to realize gains
• CDA benefit: One-third flows tax-free to shareholders

These advantages work the same way for incorporated business owners in Montréal, Toronto, and across Québec and Ontario.

For Income-Focused Investors

If you need regular income, eligible dividends may be more appropriate:

• Predictable cash flow
• Better tax treatment than interest
• No need to realize capital gains

The Structure Question

The type of income your investments generate depends on:

• What you invest in (stocks, bonds, ETFs, mutual funds)
• How investments are structured (Corporate Class funds, direct holdings)
• How often you trade (frequent trading triggers more tax events)

Structure matters more than activity in corporate investing, whether your corporation is in Québec or Ontario. See our Montréal and Toronto pages for province-specific guidance on structuring your corporate portfolio.

Frequently Asked Questions

Why do capital gains keep more cash in the corporation?

Capital gains are only 2/3 taxable at the corporate level (after June 25, 2024). This means less corporate tax is paid upfront, leaving more cash in the corporation to reinvest.

What is the Capital Dividend Account (CDA)?

The CDA is a notional account that tracks the non-taxable portion of capital gains. When capital gains are realized, 1/3 of the gain is added to the CDA. This amount can be distributed to shareholders tax-free.

Why are eligible dividends better than interest?

Eligible dividends benefit from the dividend tax credit system, which provides better personal tax treatment than interest income. They also flow through the corporation with refundable tax (RDTOH), which is refunded when dividends are paid.

Does this apply to all corporations?

These calculations assume a Canadian-controlled private corporation (CCPC) in Québec. Tax rates and rules vary by province and corporate structure. Always consult with your CPA for your specific situation.

Do these calculations apply to Ontario corporations?

Yes, the principles apply to Ontario corporations. The relative differences between interest, dividends, and capital gains remain the same. Ontario tax rates differ slightly from Québec (~0.5–1% in most brackets), which may produce slightly different dollar amounts, but the tax flow structure and relative advantages are identical. See our Toronto corporate investing page for Ontario-specific tax context.

How do Québec and Ontario tax rates differ for corporate investing?

Both provinces follow the same federal tax rules, but provincial rates differ:

• Québec: Corporate tax rates are slightly higher (~50.17% for passive income vs. ~50.17% in Ontario)
• Ontario: Dividend tax credit rates differ slightly from Québec
• Both: The $50,000 passive income threshold, CDA rules, and RDTOH mechanisms work the same way

The key insight: while exact dollar amounts may vary slightly, the tax flow structure and relative advantages of different income types are consistent across both provinces. See our Montréal and Toronto pages for province-specific details.

What about the $50,000 passive income threshold?

This page focuses on how income flows through the corporation and to shareholders. The $50,000 passive income threshold affects your Small Business Deduction (SBD) and is covered in The SBD "Grind" & Your Corporate Portfolio.

Related Articles

• Corporate Investing in Canada: Tax Costs and Structure : Complete guide to corporate investing and tax considerations
• CDA 101: The Capital Dividend Account Explained : Deep dive into how the CDA works and why it matters
• RDTOH & GRIP for Owner-Managed Corporations : Understanding refundable tax mechanisms
• The SBD "Grind" & Your Corporate Portfolio : How passive income affects your small business tax rate
• Corporate Class Funds and the Powerful Magic of Tiny Changes : How fund structure affects tax efficiency
• Corporate Investing in Montréal : Québec-specific corporate investing guidance
• Corporate Investing in Toronto : Ontario-specific corporate investing guidance

Fact Check & Sources

This article is informed by publicly available guidance and commentary from:

• Canada Revenue Agency (CRA)
• Revenu Québec (for Québec-specific tax rates)
• Ontario Ministry of Finance (for Ontario-specific tax rates)
• Major Canadian financial institutions
• Professional tax and accounting resources

Rules and interpretations change over time. Individual circumstances matter. Always consult with qualified professional advisors before implementing any strategy. See our Montréal and Toronto pages for province-specific tax context.