new rates for corporate investment income

As part of the December 7, 2015 Notice of Ways and Means Motion, several proposed rate changes were made with regards to the refundable tax provision rates. Given that top personal tax rates will generally be increasing by 4%, the Department of Finance has decided to increase the refundable tax on CCPC’s investment income so as to eliminate, or reduce, tax deferral opportunities that would have otherwise resulted.

As such, the following changes will be made:

1. The 6 2/3% refundable tax rate essentially applied to Aggregate Investment Income (AII) of CCPCs (Section 123.3) will be increased to 10 2/3%.
2. The 26 2/3% refundable portion of tax on investment income (Subsection 129(3)) will increase by 4% to 30 2/3%. This refundable tax is presently reduced where foreign tax credits exceed 9 1/3% of foreign AII. This limit will be reduced to 8%.
3. The dividend refund (Paragraph 129(1)(a)) is presently determined as the lesser of the RDTOH balance and 33 1/3% of all taxable dividends paid. The 33 1/3% will be increased to 38 1/3%.

These changes apply to taxation years that end after 2015. For such taxation years beginning before 2016, the rate increases are prorated according to the number of days in the taxation year that are after 2015.

the timing of dividends and effect on RDTOH

Finally, an increase in the Part IV Tax rate, tax on taxable dividends received by private corporations, from 33 1/3% to 38 1/3% is also proposed.  This change is not phased in based on days in the fiscal year, but will apply to all dividends received after 2015.

Editor’s Comment
This may be problematic for corporations with non-calendar year-ends. For example, assume a Corporation with a January 31, 2016 year-end receives a $100,000 dividend on January 15. Part IV tax at 38 1/3% will be $38,333. If the Corporation also pays a $100,000 dividend, its dividend refund will be $33,758, as the increased recovery rate is phased in for only 31 days of the fiscal year. That is a $4,575 shortfall.