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Ask most business owners how their corporation is taxed and you'll get a number. Eleven percent, maybe twelve. That number is real, but it's one piece of a much larger system, and treating it as the whole story is how owners end up surprised by their accountant, or worse, making expensive decisions based on half the picture.
A Canadian corporation doesn't have one tax rate. It has several, depending on how the money was earned. And the corporate tax you pay is only the first half of the bill. The second half arrives when money leaves the company and lands in your hands. The system that ties the two halves together is called integration, and it runs on four accounts that never appear on your balance sheet.
Understand those pieces and you'll be better equipped to decide how and when you pay yourself. Here's how it works. The examples use Ontario rates from the 2026 budget. Ontario's new personal dividend rates start in 2027, so these are the rates that apply from then on, unless they change again.
When a Canadian-controlled private corporation (CCPC) earns active business income, meaning profit from actually running the business, it's taxed at two possible rates.
The first $500,000 of active business income qualifies for the small business deduction. That's the federal limit; a few provinces allow more, up to $700,000, on the provincial portion. Combined federal and provincial rates on that income run from 9% to 12.2% depending on the province. In Ontario, the 2026 budget brought the combined rate down to 11.2%, effective July 1, 2026.
Profit above the small business limit is taxed at the general corporate rate, roughly 23% to 30% across the country and 26.5% in Ontario.
Compare those numbers with personal tax. Top marginal personal rates run from about 44.5% to 54.8% depending on where you live, and 53.53% in Ontario.
That gap creates the first and most important planning opportunity: deferral.
Earn a dollar of profit inside an Ontario corporation and, after 11.2% tax, you have 88.8 cents left to invest. Earn the same dollar personally at the top rate and you have 46.47 cents. At the top bracket, the corporate investor has about $1.91 working for every $1 the personal investor has.
For owners who don't need the money personally, that deferral can be a significant planning lever. As we covered last episode, though, it's deferral, not elimination. The personal tax still comes due when the money comes out; you just have more control over when.
It isn't entirely free, either. From 2027, Ontario small business income that's eventually paid out as a non-eligible dividend ends up taxed at about 54.6% in total, roughly a point more than earning it personally. That cost is worth weighing against years of compounding on more capital.
That low rate only applies to active business income. The moment your corporation earns investment income (interest from a GIC, rent from a property, the taxable half of a capital gain), the rate jumps. In Ontario, investment income inside a corporation is taxed at 50.17%, and the range across provinces is about 46.7% to 53.7%.
The logic is straightforward. If investment income were taxed at 11.2%, every high-income Canadian would use a corporation as an unlimited tax-deferred investment account. The higher rate removes that advantage.
On its face, it looks terrible: over 50% inside the corporation, then personal tax again on the way out. That's not how it works, and the reason is integration.
Integration is the principle the entire Canadian corporate tax system is built on. In a perfectly integrated system, the total tax on a dollar of profit is the same whether you earned it personally or earned it through a corporation and then paid it out to yourself.
The easiest way to picture it is a tollbooth. Corporate tax is a temporary deposit the government collects when money enters the corporation. When money eventually flows out to you as a dividend, you pay personal tax, and the system is supposed to square up.
This is the part the headlines get wrong. Stories comparing low corporate rates with high personal rates make it sound as if business owners are dodging their share. That framing misses how the system is designed. Corporate tax is the first cheque. Personal dividend tax is the second. Integration is designed so that, added together, they come out roughly equal to what you'd have paid personally.
Roughly is the operative word. How close the system gets depends on four notional accounts.
None of these accounts appears on your financial statements, but they have an outsized effect on what you keep. Your accountant tracks them: GRIP and the two RDTOH balances are reported on your corporate tax return, while the CDA is a separate running calculation.
The CDA is the holy grail of corporate tax planning: a government-sanctioned, completely tax-free pipeline out of your corporation for Canadian-resident shareholders.
When your corporation sells an investment at a gain, only half the gain is taxable at today's 50% inclusion rate. The other half is tax-free, and that tax-free half is added to the CDA. Money in the CDA can be paid to you as a capital dividend with no personal tax, no T5 slip and nothing to report on your personal return.
This isn't a loophole. If you'd made the same investment personally, half your gain would have been tax-free anyway. The CDA simply passes that tax-free half through the corporation to you, which is integration working as designed.
Two practical points. First, it doesn't happen automatically. The directors pass a resolution and your accountant files a capital dividend election, Form T2054, by the earlier of the day the dividend becomes payable or is first paid. Second, don't let CDA balances sit. Inflation erodes their value every year, and capital losses the corporation realizes later can reduce the balance. In some situations, the dividend can be declared and the funds loaned back to the corporation. That has its own legal and creditor considerations, so it should be documented and reviewed with your accountant.
(Corporate-owned life insurance also creates CDA room: the death benefit less the policy's adjusted cost basis. That's a topic for another day.)
GRIP builds up when your corporation pays tax at the higher general rate on income above the small business limit, and when it receives eligible dividends from other Canadian companies. Because tax has already been paid at the higher rate on that income, you can pay it out as an eligible dividend, which carries a larger dividend tax credit.
In Ontario, the top personal rate on eligible dividends is 39.34%. On non-eligible dividends it's 48.89% from 2027 (47.74% in 2026), and on regular income, 53.53%. GRIP is what gives you access to that cheaper exit.
The last two accounts have nearly identical names: eligible and non-eligible refundable dividend tax on hand (RDTOH). Think of them as refund buckets. They hold part of the tax your corporation paid on investment income, and the government gives that money back when the corporation pays the right kind of dividend. The refund is $1 for every $2.61 of dividends paid.
This is where the 50% investment rate starts to make sense.
Take Canadian dividends first. Say your corporation receives $100 in eligible dividends from a Canadian public company. The corporation pays $38.33 in tax, and the same $38.33 goes into the eligible RDTOH account.
Now pay $100 out to yourself as an eligible dividend. The corporation gets its full $38.33 back, so its net tax is zero. You pay $39.34 in personal tax and keep $60.66.
That's exactly what you'd have paid if you'd owned the shares personally. The money passes through the tollbooth untouched. (You do have to pay out $100 when only $61.67 is left after corporate tax, but the refund covers the difference, or you can top it up from other corporate cash.)
Interest, rent and the taxable half of capital gains are a different story. They're taxed at the full 50.17%, but only $30.67 of every $100 goes into the non-eligible RDTOH account. The other $19.50 the government keeps for good.
Work it through. On $100 of interest, the corporation pays $50.17 and has $49.83 left. Add the $30.67 refund and the most you can pay out is $80.50. That comes out as a non-eligible dividend taxed at 48.89%, so you pay $39.36 and keep $41.14. Total tax: $58.86, compared with 53.53% had you earned the interest personally. Integration isn't perfect.
But look at what you were investing. This money came from after-tax business profit you left in the corporation, the $1.91 versus $1 from earlier. In this illustration, paying about five points more tax on income earned from nearly double the starting capital can still leave you ahead. Whether it does depends on your time horizon, returns and tax bracket.
Foreign governments often withhold tax before the money reaches you. Personally, you'd claim a foreign tax credit and move on. Inside a corporation, claiming that credit also shrinks your non-eligible RDTOH by any foreign tax above 8% of the income.
Take a $100 U.S. dividend. The U.S. withholds $15 under the treaty. CRA taxes the full $100 at 50.17% but credits the $15, so Canadian tax is $35.17 and the corporation is left with $49.83. The RDTOH, normally $30.67, is reduced by $7 ($15 minus 8%) to $23.67. The most you can pay out is $73.50. After 48.89% personal tax, you keep about $37.57.
That's an eye-watering effective rate of about 62.4%, almost 9 points above Ontario's top personal rate. Yes, it sure hurts to look at. The same logic applies, though: you're investing more capital corporately than you could personally, which may offset the leak depending on how long the money stays invested.
$100 of Canadian eligible dividends: corporate tax $38.33, all $38.33 refunded, $100.00 paid out, personal tax $39.34, you keep $60.66. Total tax 39.34%, the same 39.34% as earning it personally.
$100 of interest or rent: corporate tax $50.17, $30.67 refunded, $80.50 paid out, personal tax $39.36, you keep $41.14. Total tax 58.86%, versus 53.53% earned personally.
$100 U.S. dividend: corporate tax $50.17 (including $15 U.S. withholding), $23.67 refunded, $73.50 paid out, personal tax $35.93, you keep $37.57. Total tax 62.4%, versus 53.53% earned personally.
Ontario, top marginal rates, personal dividend rates from 2027.
Your corporation isn't a single bank account with a single tax rate. It's a system of interconnected plumbing, and the four notional accounts are the valves. A few practical takeaways:
Corporate tax is complicated, and if this is the first time anyone has walked you through it, you can be forgiven for needing a second read. These accounts are worth raising with your accountant and advisor every year, and especially whenever you're deciding how and when to pay yourself.
This article is for general educational purposes only and is not tax, legal, accounting or investment advice. Examples are simplified illustrations assuming top Ontario marginal rates as announced in the 2026 provincial budget, as of October 2026. Rules vary by province, change over time and may not reflect your circumstances. Speak with a qualified professional about your own situation before acting.
If you own a Canadian corporation and nobody has ever walked you through how Canadian corporate tax actually works, start here. This is the foundation for everything else on corporate tax planning.
In this video Jason explains how Canadian-controlled private corporations are taxed: the small business rate, the general rate and the much higher rate on investment income. He covers what integration is and why it matters, and the four notional accounts (the capital dividend account, GRIP and the two RDTOH accounts) that decide how much tax you really pay when money comes out of your company. All examples use Ontario rates from the 2026 budget.
This video is for general educational purposes only and is not tax, legal, accounting, or investment advice. Rules vary by province and change over time. Speak with a qualified professional about your own situation before acting.
Corporations are subject to some of the biggest myths in Canadian taxation. And yes, they can be complex. But understanding the fundamentals of how taxation works within them is the difference between being smart about how they are used versus making some potentially very costly mistakes.
In this deep dive episode, I'm going to walk you through the fundamental architectures of our tax system, how corporations are taxed in Canada, what integration is and why it matters, the four notional accounts that you need to know about, and how you can use your corporations as a means of building your retirement future.
If you own a Canadian-controlled private corporation, whether you're a physician, a lawyer, a tech founder, a tradesperson, this is all foundational knowledge that you need.
So grab your T2 corporate tax return, open your financial statements, and let's start from the beginning. And if no one has ever walked you through this, subscribe now. This series is going to change how you think about your corporate wealth.
Now, let's start with the basics, because even sophisticated business owners sometimes have gaps in their understanding when it comes to these factors.
When a Canadian-controlled private corporation earns active business income, that means income earned from actually running the business, generating money in Canada.
That money is taxed as income at two different rates depending on how much profit the company generates. The first 500 to 700,000 of active business income profit, depending on what province you're in, benefits from the small business tax deduction. This is a preferential tax rate intended to help small businesses reinvest, hire employees, and grow.
This rate varies from as low as 9% to as high as 12.2%, depending on your province. For the rest of this video, I'm going to demonstrate all the numbers, including the Ontario rates that were just announced in the 2026 budget. That has a combined federal and provincial small business tax rate of 11.2% starting on July 1st, 2026.
That said, one caveat here. Ontario is only adjusting personal rates for 2027, so the following examples are going to apply for 2027 going forward. But the 2026 numbers are really close.
Anything above that small business threshold gets taxed at the general corporate tax rate, which varies between 23 and 30%, at 26.5% in Ontario. Now, these rates are substantially lower than personal income tax rates. The top marginal tax rate across the country varies between 44.5 to 54.8%, depending on where you live.
So this is your first opportunity here, deferral of income. If you don't need to take the money out of the corporation, leave it behind.
In Ontario, that leaves you with 88.8 cents per dollar of profit after paying the 11.2% tax. This is in comparison to being left with 46.7 cents after paying 53.53 if you are in the top bracket.
So the appeal is obvious.
You're left with 91% more cash to invest back in your company or into other investments.
But there is a catch.
That low tax rate only applies to active business income. That's income you've earned from running your actual business. If you invest money in your investments within your corporation, well, you don't get the same low tax rate that you do from active business income. In fact, you pay a far greater one, one that ranges between 46.7 to 54.7%, depending on your province or territory.
Now, on the surface, this sounds terrible. Because after all, you're going to pay more tax on that money when it comes out of your corporation. So paying more now upwards of 50% and then again when it comes out doesn't seem to make a lot of sense. Only that's not how it works.
To understand why, you have to understand one concept, the concept of integration.
Integration is the theoretical concept that the entire Canadian corporate tax system is built around. In a perfectly integrated system, the total tax you pay on a dollar of profit should be the same, no matter how you earned it, or at least that's what the principle is. Whether you earned that dollar personally and paid personal income tax on it directly, or whether you earned that dollar through a corporation, paid corporate taxes first, and then paid personal taxes when you extracted the money as a dividend... The total tax bill should come out identical.
The government's stated goal is that the corporation should function as a tax tollbooth. It collects a temporary deposit by way of corporate taxes, holds onto that until money eventually flows out of the corporation to you personally, and then at that point, the system is supposed to square up.
Many people, including the media, routinely get this concept wrong. They compare low corporate tax rates and high personal tax rates and make it sound as if corporations are evading their fair share. But those are two separate installments on the same tax bill. The corporate tax rate is the first check that gets paid. The personal dividend tax is the second check that gets paid. Integration means that they're supposed to add up to roughly the same total, and in theory, it mostly works.
Across Canada, integrated tax rates on corporate income that's eventually paid out as dividends approximately equals personal tax rates on the same income as if you had earned it directly. So investing in your corporation and taking that same dollar and investing it personally should equal close to the same bill.
But there's a critical word in this sentence: approximately.
Now, maybe asking yourself how is it possible given you pay corporate tax rates and then personal tax rates, and some of those numbers are both north of 50%? Well, the answer is that integration relies heavily on four notional accounts that help square up the bill. These aren't accounts that show up anywhere on your balance sheet, but they have a massive impact on your tax bill. So let's go over them one at a time.
First, we'll talk about the capital dividend account, known as the CDA. The CDA is basically the holy grail of corporate tax planning. It's your government-sanctioned, completely tax-free pipeline to take money out of the corporation. Yes, sounds incredible. But let's understand how it works.
See, when you sell an asset inside your corporation, a stock or a piece of commercial real estate or any other form of investment, you realize a capital gain if you sell it at a profit.
If that profit is there, then basically a portion of that gain is taxable, and the other portion is tax-free. Currently in Canada, the split is 50/50. That means half your gain is taxable at passive corporate income tax rates, and the other half isn't taxable. But that amount flows directly into your capital dividend account.
Additionally, if you have a corporate-owned life insurance policy, the death benefit paid out to your corporation minus the adjusted cost base of the policy also flows fully into your CDA. Now, this can be a huge number depending on the situation. However, there's a downside here. You need to die in order to get CDA from insurance. But let's not focus on that right now. Let's focus on CDA credits that you will earn while you're alive from investing. We'll come back to insurance in a future video.
Now, money in the CDA can be distributed to you personally as a capital dividend completely tax-free. There's no T5 slip, there's no personal tax brackets applied, no gross up, just pure tax-free cash. Like I said, it's the holy grail.
But why is this? And how is this fair? Well, because the reality is the same thing would have happened if you owned it personally anyway.
If you had invested money personally and sold at a gain, half of the gain would be tax-free anyway because the integration rate or the inclusion rate on taxation of capital gains is the same. Only 50% is taxable. So what they're doing here is they're flowing through the tax-free gain that you would have gotten personally anyway out to you tax-free. So no big loophole here, just a simple planning opportunity.
Now, what happens to the taxable half? We'll get to that shortly. But let's be clear, this doesn't happen automatically. Your accountant must file a specific election, a T2054, with certification from the board that basically approves a capital dividend.
Even if you don't take it out, you can always book the dividend as a payment and then loan the money back to the corporation, which will allow you to draw that money out tax-free at any point in the future without any further filings. And a key factor here is that the money in there should really be pulled out as soon as possible. And the reason is because every calendar year that passes, it's actually worth less due to inflation. So the real value of your CDA is actually reducing in real terms year over year.
Next, we have the second account, the general rate income pool, or GRIP.
GRIP is generated when your corporation pays the higher tax rate corporately. That means on any income over and above the five to $700,000 that the small business rate applies to. In Ontario, this higher rate is 26.5% rather than the small subsidized rate of 11.2.
The GRIP amount tells you how much you can pay to your corporation as an eligible dividend that comes with a high dividend tax credit. The reason for this is because the corporation already paid the higher tax bill on that GRIP. So CRA gives you a correspondingly large tax credit when you pay in your personal return. The result is that your personal tax rate on eligible dividends in Ontario is capped at 39.34% at the highest marginal tax rate. Compare that to non-eligible dividends, which we'll discuss next, where the top rate is 48.89%. That's nearly a 10 percentage point spread, and an even greater one when we're talking about regular income at 54.53.
GRIP is how you access this cheaper extraction route. That looks really appealing, doesn't it? Only one problem. It's not the full story. To understand the full story, you're going to have to understand two other accounts. Now, these are two accounts with two very similar name: eligible and non-eligible refundable dividend tax on hand.
These two accounts are your refund buckets. They represent money that the government's holding that can be refunded back to your corporation when certain dividends are paid out from your corporation to shareholders.
When your company earns passive income, interest from a GIC, rental income, from corporate-owned property, dividends from a foreign stock, or that taxable half of the capital gain - if CRA only charged you 11.2% small business tax rate on that passive income inside the corporation, every high net worth individual in Canada would use their corporation as an unlimited tax-deferred investment account.
As mentioned, to prevent this, CRA hits you with a passive corporate income tax rate of 50.17 in Ontario. But just like personally, the tax rate on dividends is lower.
Now, if the return you earn on your money invested in the corporation pays out any dividends from Canadian publicly traded corporations, then those dividends are taxed at 38.33%.
But this is just a prepayment.
That 38.33% also gives you the same amount of credit to your eligible dividend tax on hand account or ERDTOH account. These are dividends that are subject to lower tax rates because the company paying them already paid CRA at the general rate and not the small business rate.
To recover this amount, this ERDTOH, you pay yourself an eligible dividend up to the amount in your GRIP account. You then pay tax on that personally, which Ontario is up to 39.34% in 2027.
Now before you go thinking you just paid over 70% total in taxes, here's the refundable part.
For every $2.61 in eligible dividends you pay out, you get back $1 from your ERDTOH account.
So I know that's a lot. Let's go through an example and show you some basic math.
Let's say you receive $100 in eligible dividends from a Canadian stock you own in your corporation. Your corporation will then pay $38.33 in tax on that income and will also be credited into your eligible RDTOH account the exact same amount.
From there, if you pay out $100 from the corporation to yourself, personally, you will pay personal Ontario taxes of $39.34, leaving you with $60.66 personally. Meanwhile, your company just got refunded the full 38.33 and ended up paying a total tax bill of zero.
Now, yes, you have to pay out the $100 pre-tax despite having only $61 and change left after paying corporate taxes. But keep in mind that if you pay out the 61, you will get the RDTOH back, which you can pay out again, and so on and so on until you net zero taxes. That, or you just make up the difference with other corporate money.
But the point is really straightforward. In the end, when you take out the $100 from your company, you'll end up with $60.66 personally. The feds will end up with 39.34 dollars from, from yourself personally, and the entire thing will be solely personal taxation.
The corporation will have paid a grand total of zero.
This is the exact same tax bill if you had earned that dividend personally. This is a place where integration works perfectly. It basically passes through the toll booth completely unscathed.
The story is not the same for interest rents or the taxable half of capital gains. These instead are taxed at the full 50.17%. And instead of getting eligible RDTOH credits, they instead get non-eligible refundable dividend tax on hand, or non-eligible RDTOH, or NERDTOH, for all of 30.67 or $30.67 per $100 of income.
Now, to recover this NERDTOH, you have to pay out a non-eligible dividend, which is taxable at 48.89, which is higher than the other dividend we just talked about. When you do, you get back a dollar for every $2.61 you paid out, just like in the last example.
But this all shakes out a little bit differently. Why? Let's take a look.
So let's look at the same example with $100 of income flowing into the company. Doesn't matter from where, just assume it qualifies for this higher rate. So you pay $51.17, leaving you with $49.83.
The NERDTOH balance now goes up to $30.67. Now here's the key difference to pay attention to. You did not receive 100% of your tax bill in the refundable dividend tax account. You only got $30.67, not $50.17. That means CRA is holding on to 19.50, and that's the end of it.
So the most you can now distribute is not the 100, it's $80.50, what you're left with plus the refund. When you pay out that $80.50, you end up paying the 48.89% for a total tax bill of 39.36, leaving you with $41.14.
In the end, you only end up with $41.14 for $100 paid.
The feds will take $39.36 personally and 19.50 from you corporately. That's a total tax bill of 58.86. Compare that to the 53.53 in Ontario and, uh, yeah. Uh, remember what I said about integration not being perfect? Well, here's an example. You're basically 5.33% worse off for having earned money in the corporation than personally. But also, not really, because these funds came out of after-tax active income, and you just left them there to grow and invest on almost double the amount, which means that you're still better off because you were investing $1.91 corporately versus $1 personally and paying 5.33%, a little bit more tax, is a pretty good deal.
But there's one more example I've got to give you when it comes to RDTOH, and that's what happens when you earn foreign income in a corporation. Foreign income is often subject to foreign withholding tax depending on the jurisdiction of the investment, the cross-border treaty with Canada, and the nature of the income. That means that in many cases, but not all, you will be paying withholding tax to a foreign nation on the money before it even hits CRA's radar. And CRA will apply the full passive rate while giving you credit for the money that was paid elsewhere.
The problem is, is that the NERDTOH, which is 30.67%, there's a catch here.
And that has to do with the fact that the foreign tax is treated differently when it comes to corporations. Normally, if you earned foreign tax or earned foreign income personally and paid withholding tax, you would re- it would reduce the tax that you owe in Canada. However, corporately, it's different. Claiming foreign tax credits on this amount will also reduce your NERDTOH by any amount over 8% of that income.
Yeah, it's, uh, kind of complicated, um, but to see how it works, let's look at a simple example using a US dividend.
So for an example, the US company you own shares of pays a dividend of $100. Under the cross-border treaty, the US will take $15 off the top to the IRS as foreign withholding tax. But then the CRA gives you credit for that. They look at-- They tax you on the full 100 at 50.17, but then subtract out the $15 you paid the US to give you a final tax bill of $35.17, leaving you with $49.83. But then your NERDTOH, which is normally 30.67, gets reduced by 15 minus 8 for a total of 7, bringing your NERDTOH balance down to 23.67.
So now the most you can pay out is the money left behind plus the reduced NERDTOH of 23.67 for a total of 73.50. You then pay personal taxes on that of 48.89% for a total of $35.94, leaving you with all of $37.56, making this an effective tax rate of an eye-watering 62.44%, which is 8.91% worse off than a top marginal tax bracket in Ontario.
So again, why on the face of looking at the 60% tax rate would you want to do this? And I'm going to remind you again that you are investing a lot more money corporately than you would have been able to personally. That $1.91 in Ontario corporately versus the dollar personally makes paying that $8.91 a pretty good deal still.
So despite this, you're still better off. But yeah, it sure hurts to look at.
So let's recap what we covered in this episode.
Corporate taxation in Canada is built on the principle of integration. The idea that a dollar should be taxed at the same rate regardless of whether you earn it personally or through a corporation once the bill is all settled.
In theory, a corporation is just a toll booth. In practice, the system leaks. And those leaks, especially after the 2026 budget changes, can cost you real money. Your corporate structure is not a single bank account. It is a system of interconnected plumbing controlled by four different notional accounts. The CDA, which is your tax-free pipeline. GRIP, which allows you to take out lower taxed eligible dividends. And eligible dividend tax on hand and non-eligible tax on hand, which are the refund buckets that CRA holds onto your money for until you pay out the right dividend.
And as I said, integration isn't perfect, but it's pretty close. And in most cases, it varies from province to province and income to income. Because let's face it, we have 13 jurisdictions and getting them all on the same page is never going to happen.
And while it does create some form of tax fairness, it also creates opportunities for business owners to do better with their taxable income and extract money only when needed and in smart ways. Knowing your notional account balances and taking them into consideration when planning how to pay yourself an income or additional funds out of your corporation is vital to tax efficiency as a business owner.
Make sure that you do not overlook this. And as always, talk to your professionals about this.
This is complicated. There was a lot covered and you can be forgiven for not fully wrapping your head around it. But your professionals should deeply understand these concepts. I'm Jason Pereira. And if you found this interesting, be sure to like and subscribe. I'll have more business owner content coming out soon.
Jason works one-on-one with Canadian owner-operators on compensation, corporate structure, investments, and succession.