A Tax-Smart Guide for Incorporated Business Owners in Ontario
Business is doing well and the profits are rolling in. You’re piling up excess cash you don’t need to reinvest into the business. You could pay it out as salary or dividends, but is that the best move?
Before withdrawing the money, consider whether your corporation should be the one to invest it. Through a corporate investment account, your company can invest in stocks, ETFs, bonds, GICs, and other products while keeping the capital inside the business. At Cassar CPA, our founder Matt Cassar has spent over fifteen years helping incorporated professionals across the GTA navigate this decision. Here is what you need to know.
The Tax Deferral Advantage
The appeal of corporate investing comes down to one thing: you have more money to invest with. When your CCPC earns active business income under $500,000, it is taxed at a combined rate of just 12.2% in Ontario. If your personal marginal rate is 53.53% at the top bracket, the difference is substantial.
On $200,000 of active business income, your corporation pays roughly $24,400 in tax, leaving $175,600 to invest. Had you withdrawn that same amount as salary, personal tax and CPP contributions would leave you with significantly less. The trade-off is that you will eventually pay personal tax when you withdraw the funds, but in the meantime, you are investing a much larger pool of capital.
You also gain flexibility in timing. By leaving funds invested in the corporation, you can withdraw them in years when your personal income is lower, potentially at a lower personal tax rate. For professionals with fluctuating income or those approaching retirement, this can be a meaningful advantage.
How Investment Income Is Taxed Inside Your Corporation
Here is where many business owners are caught off guard. While active business income is taxed at 12.2%, investment income earned inside a CCPC, interest, rental income, and taxable capital gains, is taxed at approximately 50.17% in Ontario. That rate is intentionally high to prevent an indefinite tax deferral on passive income.
However, a significant portion of that tax (30.67%) is refundable through a mechanism called Refundable Dividend Tax on Hand (RDTOH). When your corporation pays taxable dividends to you, it receives a refund from the RDTOH account. The system is designed so that the total tax, corporate plus personal, roughly equals what you would have paid investing personally. The real benefit is not a lower overall rate; it is the deferral.
Why Capital Gains Are the Most Tax-Efficient Choice
Not all investment income is treated equally. Capital gains receive the most favourable treatment inside a corporation: only 50% of the gain is included in taxable income (the inclusion rate remains at 50% for 2026, after the government cancelled the proposed increase in March 2025). The non-taxable 50% is added to your corporation’s Capital Dividend Account (CDA), and amounts in the CDA can be paid out to shareholders completely tax-free.
This makes growth-oriented investments, stocks, equity ETFs, and real estate, particularly attractive inside a corporate structure. Interest income, by contrast, is fully taxable at the ~50.17% rate with no CDA benefit. When choosing what to invest in, the type of income generated matters as much as the rate of return.
Watch the $50,000 Passive Income Threshold
This is the single most important consideration our team raises with clients building corporate investment portfolios. Since 2019, CCPCs earning more than $50,000 in annual passive investment income (adjusted aggregate investment income, or AAII) face a grind on their small business deduction. For every $1 of AAII above $50,000, the SBD limit is reduced by $5. At $150,000 of AAII, the deduction is eliminated entirely, meaning all active business income is taxed at 26.5% instead of 12.2%.
For an Ontario CCPC earning $500,000 in active business income, losing the SBD entirely would cost an additional $71,500 in corporate tax. That can easily exceed the investment returns that generated the passive income in the first place. Strategies to manage this threshold include favouring investments that generate unrealized gains (growth stocks, equity ETFs) rather than annual income, timing when you realize capital gains, and using corporate-owned permanent life insurance, whose cash value growth does not count as AAII.
When Personal Investing Makes More Sense
Corporate investing is not always the better choice. If you have unused RRSP, TFSA, or FHSA contribution room, those registered accounts offer fully tax-sheltered growth that is generally more efficient than a corporate investment account. Prioritize filling your registered accounts before investing heavily inside the corporation.
Additionally, if your corporation’s passive income is approaching the $50,000 threshold, further corporate investments could erode your small business deduction at a cost that outweighs the returns. And keep in mind that assets held inside your operating corporation are exposed to business creditors, if asset protection is a concern, a separate holding company structure may be worth exploring.
How Cassar CPA Can Help
Deciding what to do with your corporation’s excess cash sits at the intersection of tax planning, investment strategy, and business protection. From our offices in Toronto and Oakville, we work with incorporated professionals to evaluate the trade-offs and build a plan that fits their full financial picture.