Capital Gains Tax Within a Corporation

As I have setup a corporation to hold my online business, I’m learning the ins and outs of how taxes work within a corporation.  More specifically, how to effectively extract money from a corporation in a tax efficient manner.  For example, the dividend sprinkling strategy allows effective income splitting for shareholders within the family.

One thing I’ve recently been curious about is investing within a corporation and the resulting taxation. More specifically, resulting capital gains when selling investments or assets. Capital gains within a corporation works similarly to capital gains taxed personally but with notable exceptions. The difference lies in the type of capital gains.  Capitals gains coming from the sale of capital assets that produce active income are taxed more favorably than capital gains from investments behind a corporation.

If active income generating assets are sold (like a website within a media company), 50% of the profit is added as income to the corporation.  If the resulting corporate income for that year is within the small business rate threshold (16% in NL), then the overall taxation on the capital gain is 8%.  If investments are sold for capital gain, then the tax rate is higher.  50% of the profit in this case is taxed at the highest corporate rate (~50%), which will result in a ~25% tax on the gain.

One thing you may be wondering is what happens to the 50% that is not taxable? To put it simply, that portion can be flowed through to shareholders tax free.

Here are more specifics from Tax Guy:

One of the dilemma’s corporate business owners have is how to effectively get money out of the corporation.

If your corporation sells capital property, the gain is subject to the 50% inclusion rate. The 50% that is not taxed is added to a notional tax account called the Capital Dividend Account (CDA). You can then pay yourself a tax free capital dividend from the CDA.

I have another question if you have a moment. If I were to invest behind a corporation, I understand that dividend/interest income from those investments are taxed at a higher rate. However how do capital gains work within a corporate investment account? I realize that 50% is taxable on the capital gains, but at what rate? If my business qualifies for the small business deduction, and gets taxed @ 16% (in NL), does that mean that 50% of my profit gets added to corporate income and taxed at 16%? What happens to the other 50% of the profit that’s not taxable? Can shareholders withdraw it?

If the corporation sells property used in the production of active business, the rate of tax is effectively 8% (on the full gain). On the other hand if the corporation has passive investments (i.e. stocks and bonds), the tax rate is 1/2 of the maximum rate for a corporation or 24.34%.

As an example, if you sold investment held personally, that has a cost of $10,000 and a market value of $15,000, the tax on the capital gain would be $1,112.50 (22.25% of $5,000 assuming you are in the top marginal rate and the investment sold is passive). Your after tax gain is $3,887.50.

On the other hand, assume your corporation holds the same passive investment and sells it and flows the profits to you as a shareholder. The corporation has a gain of $5,000 of which $2,500 is taxable at 48.67% ($1,216.75) and the other half is added to the Capital dividend account. You can see the corporation paid $104.25 more tax.

At this point, if you were to flow this money out of the corporation, the capital dividend would be paid to your tax free and you would pay out the remaining $1,283.25 as an ineligible dividend to which you pay 32.17% on.

After flowing these funds into the shareholders hands, the after tax gain is $2,500 capital dividend paid, plus $1,283.25 ineligible dividend, less $419.75 personal tax on the ineligible dividend. Or $3,363.50.

So you can see, by slowing out the investment income, you end up paying $524.00 more tax. Now keep in mind, that is assumes you need to flow the income out. You could retain the income in the corporation and continue to pay slightly higher tax on the investment income at 48.67% than you would personally and avoid an immediate tax hit by flowing out the income.

The strategy many corporation take is to either invest accumulated cash back into the business to produce active business income. When excess cash is accumulated (i.e. more than 10% of your assets) it eliminates your ability to qualify for the personal capital gains deduction and you need to consider flowing the money out via the CDA or by rolling out the excess cash to a holding company.

Other ways to get cash out of a corporation are via the estate plan and using a universal life policy.

So for those of you with corporations, do you have any other tax tips for me?

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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ikram khan
3 years ago

i am in process of selling my apartment complexes, which is held in C corp.
property is 80% depreciated, would i be paying taxes on corporate income, and then pay the tax on the balance, as i take the dividends.
its about 4 million dollars transaction.
would that create double taxation,?

11 years ago

Sean, your best bet would be to incorporate and have the income taxed through a corp rather than personally. Also somewhat obvious but always a good idea to max out your TFSAs first.

11 years ago

Thanks for that. What about options premiums? e.g. writing covered calls, selling puts?

11 years ago

What about tax treatment of dividends within a corporation? e.g. my corp passively invests in SJR.B and receives $500 in dividends

11 years ago

Love the discussion here. My wife and I are in our early 30’s and are wondering what the best structure would be to invest so as not to pay huge taxes. We’re talking low 7 figures in investment dollars so a 45% tax rate is a huge hit.

This would be pure passive income and we’d just be investing in safe stocks. Is it better to go offshore with this? Any countries with favourable passive income tax policies?

Thank you in advance!

12 years ago


If you are in BC or Alberta, I will likely be able to help you out. I’ve done quite a bit of work in the last couple years on your exact situation with people your age. Myself, I’m only 30.

Tyson Russell

P.S. If you are on Facebook you can find my Estate and Business Planning page by just searching my name. :)

13 years ago

We own a small business in Canada and are transferring our passive assets into a holding company to purify the corporation. We have been looking into making foreign real estate purchases with the holding company and are curious if we are able to make income from rentals etc. I have also read you cannot provide goods or services through your holdco. Are rentals considered a service? It is considered passive income and I have also read you really pay heavy tax on passive income.

I have also been looking into a universal life policy as well and other investments (we have been purchasing stocks and have recently been told we pay 45% capital gains tax on these). Is it best to keep all investments such as a UL in the holding company? We are late 20’s, early thirtys looking for any advice that will help us deffer tax/contribute to retirement. Comments greatly appreciated!