My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, May 26, 2014

Using a Corporation to Hold Your Investments

In December 2011, I wrote a post titled “Should your Investment Income be Earned in a Corporation”. Notwithstanding this post, I continue to receive questions and emails on two related topics:

1. Readers who are earning substantial personal investment income ask; should they transfer their investments into a corporation?

2. Small business owners with excess investable assets inquire if they should incorporate a holding company to hold the shares of their existing active corporation’s? An active corporation is a corporation that carries on a real business (manufacturing, providing services, etc.) that does not earn rental income (see exception below), royalties, interest, dividends or capital gains.

Based on these questions and the fact that my clients who have corporations that earn investment income, either ask me to “explain this again” each year or just roll their eyes, when I discuss the taxation of investment income, I figured I would give this topic one more try.

Please note that all tax rates noted below ignore (figuratively and literally) the May 1st Ontario Budget.

Reasons to Incorporate Investment Income

For income tax purposes (as I detail below), there are essentially no reasons to incorporate investment income. However, there are several non-income tax related reasons for which it may make sense to incorporate your investment income.

1. Creditor Proofing - If you have an active corporation (“Opco”), you can protect your cash and retained earnings from creditors (assuming this is not a fraudulent conveyance) by paying any excess cash or retained earnings as a dividend to a newly formed Investment Holding Company (“Holdco”). As long as the Holdco is connected to the Opco for income tax purposes (simplistically, owns greater than 10% of Opco), any dividends can be paid tax-free to Holdco.

This allows you to use tax-deferred funds to invest (i.e.: in Ontario, the small business rate is only 15.5%, so potentially you may defer and have 31% more funds to invest [46.46% high non-super tax rate if you earn income personally-15.5% corporate rate]). Once the excess funds have been transferred and your Holdco earns investment income on these funds, the tax is essentially the exact same amount you would have paid if you earned the income personally. Thus you have no significant tax savings by using a Holdco to earn investment income, the main benefit is creditor proofing. [Note: For fancier planning, you may be able to use a family trust to own Opco and have a holding company as a beneficiary of the family trust].

2. U.S. Estate Tax - if you own U.S. securities, you can avoid U.S. estate tax by moving these securities into a Holdco. However, again there are no actual Canadian income tax savings.

3. Rental Properties- Many people incorporate their rental properties. However, unless you are a large rental operation with more than five employees, the only reason to do this is for creditor proofing in case a tenant or visitor to the building sues you.

There may be a couple other reasons, but these are the three main reasons people use a Holdco for their investment income.

Double Taxation

The utilization of a Holdco is potentially problematic when you pass away. The reason for this is that upon death, you are deemed to dispose of your Holdco shares on your final terminal tax return for their fair market value (unless they are left to your spouse). So you pay tax upon your death on the value of these shares. However, when your estate starts selling the individual securities in Holdco, the Holdco has to pay tax on the same securities you paid tax upon on your final return, a double tax. In order to avoid this result, fancy tax planning is typically undertaken, which can be costly and cumbersome.

Why There are no Tax savings

If you read my December, 2011 post, you will realize that the reason there is no benefit to incorporating your investment income, is because of the extra layer of tax imposed by a refundable tax known as RDTOH (“Refundable Dividend Tax on Hand”).

As I mentioned above, I have been unsuccessful in trying to explain this RDTOH mechanism to my clients, and have now taken a new simpler approach which I will use below.

My examples will use a high-rate Ontario taxpayer (not super-rate) who pays tax at the rate of 46.41% on any interest income earned, 29.54% on eligible dividends and 23.2% on capital gains.


If you use a Holdco and earn $1,000 in interest income, you would pay the following corporate income tax:

Non-refundable corporate tax $195

Refundable tax $267

Total Tax $462 (46.2%)

As I note above, a high-rate Ontario taxpayer would pay 46.41% on interest income. Thus, for all intents and purposes, there is no benefit to incorporating investment income to earn interest income as the corporate tax rate is almost exactly the same as the personal rate. Further the administrative costs (especially the costs paid to your accountant) of maintaining a corporation would also impact negatively on the use of  a corporation.

Eligible Dividends

If you use a Holdco and earn $1,000 in public company dividends, you would pay corporate tax as follows:

Non-refundable corporate tax $0

Refundable tax $333

Total Tax $333 (33.3%)

As I note above, a high-rate Ontario taxpayer would pay 29.54% tax on an eligible dividend. Thus, the corporation pays more tax initially and there is no benefit to incorporating eligible dividend income (or non-eligible dividend income). However, when a dividend is paid by Holdco, the refundable tax is refunded by the CRA and the taxpayer ends up with an actual tax cost of 29.54%, so there is not an extra tax cost, just an initial disincentive to incorporate dividend income.

Capital Gains

If you use a Holdco and earn $1,000 in capital gains, you would pay corporate tax as follows:

Non-refundable corporate tax $98

Refundable tax $133

Total Tax $231 (23.1%)

As I note above, a high-rate Ontario taxpayer would pay 23.21% on a capital gain. Thus, again, for all intents and purposes there is no benefit to incorporating capital gain income, as the corporate tax rate is almost exactly the same as the personal rate.

I hope I have done a better job simplifying this complicated issue so I don’t have to revisit this issue again in the future; if not, I cry uncle anyways.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to changes in legislation or law.


  1. Hi Mark, are foreign dividends treated differently in this case?

    1. Hi Richard:

      Foreign dividends are treated essentially like interest, however, you may get a foreign tax credit. However, again, a corp. does not provide any meaningful benefit.

  2. Hello Mark,
    Thanks very much for the ongoing series of posts. They are very helpful and provide excellent insight into complex areas.

    I have been told the other reason for having a holdco for investment income is that if you are retired then it reduces your regular income and this potentially avoid various government clawbacks. IE The extra income does not need to be declared personally and thus the clawbacks are avoided. Clearly the holdco still pays tax on the income. Do you agree this strategy is valid?


    1. Hi Paul:

      Yes, this strategy is valid.However, you are weighing typically fairly significant accounting costs and way more complexity (including avoiding the double tax issue down the road) against the clawback savings. I have never had a client decide to do this solely for this reason, but I have heard of others doing this.

  3. Hello Mark,
    This analysis does not take into account that the 1000 left in the corporation was taxed at a smaller rate (small corporation rate) then if it was taken out (and personal tax was paid at a higher bracket). Hence, the initial investment amount will be higher if the money is left in the corporation. Could you please comment.

    Thank you,

    1. Hi Eric

      This post was purely about whether investment income, not active income benefited from being incorporated. I have written multiple times already on the benefit of leaving money in the corp and the salary vs dividend decision, just use the search function if u have not read these posts.

  4. Hi Mark,

    Could one use an investment corporation in conjunction with dividend sprinkling to optimize dividends between spouses? I picture an initial investment and then each year distributing the dividends to the lower net income spouse.

    1. Hi Steve

      The may be income attribution or corporate attribution issues here. I cannot provide a generic answer. I would consult your accountant or get advice prior to undertaking such.

  5. Thanks very much Mark, that was very helpful.

    One question for you. At what point do you have to be careful about how many assets are securities in the holdco that you would be subject to Investment company status? Ie. if Opco is worth 1mil, fully owned by Holdco, but over time with cash dividend up to Holdco and good investments the securities portfolio exceeds 1mil would that be an issue that you are now more of an investment manager? Or does this only come into play if you have multiple owners of the holdco?

    Thanks very much for your informational blog!

    1. HI Anon

      Holdco is always considered investment company and subject to higher corp tax rate. I think you are asking could you be considered a trader. Not typically an issue for Holdco where you have money managed or don't make 20 trades a day.

  6. Hi Mark,

    I have an active opco that has been in operation for just over 1 year. I set it up with 20000 shares at .01 per share, it is now worth3.35 per share how can I transfere these shares into a new holdco.

    1. Hi SVS

      You should speak to your accountant on whether this makes sense based on the cost to do so and the various alternatives. Your accountant may tell you to consider undertaking a section 85 rollover, which in English means you will now own your Holdco and your Holdco will own your Opco. However, there are alternative and fancier options including using a family trust, so again, u need to speak to your accountant about what is best for your situation

  7. Hi great blog.

    Im still stuck kn the explaining agian lol.

    Heres my situation. I recently incorporated my painting company. Its basically just me and i get contract painting jobs to keep it simple.
    Income each year is between 70-130 but i only need 50k to live basically.

    I want to do something with this extra money that is just sitting there.
    I have some experience buy and selling stock on my personal finances (mostly etf and reits) anyways can i just open up a stock trading account under my corporate. Or what do other people do with extra business money?

    Thanks Steven

    1. Hi Steven

      Yes, if you have excess cash in your corporation you can invest that in a stock trading account under your corporations name. Many clients invest as you suggest in stocks, ETFs etc, some use it to buy real estate, and some to invest in other businesses. The issue you need to consider is if the excess cash becomes large, is their any chance you can be sued. If so you may want to incorporate a holding co. Given your business it appears unlikely you would have a large lawsuit, so you may not need a Holdco, however, you would have to assess the risk of being sued for a large amount of money in your operating co.