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An investment holding company pays tax on what it earns, and the rules change depending on the type of income. Dividends from an unrelated corporation face a 38 1/3% Part IV tax, interest and rent carry extra refundable tax, and once passive income passes $50,000 a year it starts shrinking the small business rate on your operating company.
How are dividends between companies taxed?
How closely the two are tied decides it. Under the CRA’s T2 guide, a taxable dividend from a non-connected corporation is subject to Part IV tax at 38 1/3%. A dividend from a connected corporation attracts Part IV tax only when paying it gives the payer a dividend refund.
Connected has a plain definition. Your holding company controls the payer, or it owns more than 10% of the voting shares and more than 10% of their fair market value. That’s why moving money up from your own operating company usually costs nothing extra, while a holdco owning a small slice of a bank stock doesn’t get that break.
Say your holdco receives $100,000 in dividends from shares it owns in a public company. Part IV tax is $38,333. It isn’t lost, though. It generally comes back when the holdco pays out its own taxable dividends, so this is a timing cost more than a permanent one. The exact refund mechanism sits on Schedule 3, so ask whoever files the T2 to walk you through it.
What tax do you pay on interest, rent and gains inside the company?
Investment income of a Canadian-controlled private corporation doesn’t get the small business rate. The Income Tax Act adds a further refundable tax of 10 2/3% on the lesser of the company’s aggregate investment income and its taxable income above the small business threshold. The federal basic rate is 38% before the 10% abatement. Adding the two gives roughly 38.7% federally, our own arithmetic and not a figure on a CRA table, and provincial tax comes on top.
Capital gains work differently. Half the gain is taxable, and the proposed rise to two-thirds was cancelled in March 2025. The 50% figure for 2026 is our inference from that cancellation notice, so check it if a large sale is coming. To see the personal side of the same gain, use the capital gains tax calculator.
Why does passive income cost you the small business rate?
This is the rule that catches people out. The $500,000 business limit falls when adjusted aggregate investment income is between $50,000 and $150,000, and it’s nil at $150,000. That works out to $5 of limit lost for every $1 of passive income over $50,000.
| Adjusted aggregate investment income | Business limit left |
|---|---|
| $50,000 or less | $500,000 |
| $70,000 | $400,000 |
| $100,000 | $250,000 |
| $150,000 or more | $0 |
Read the second row like this. At $70,000, you’re $20,000 over, and $20,000 times five is $100,000 of limit gone. A holdco with a few rental properties and a stock portfolio can drift there without anyone planning it.
What does losing $100,000 of limit cost? The corporate tax calculator gives Ontario 11.696% on small business income and 26.5% above the limit for a calendar 2026 year. The 11.696% is a derived blend, because Ontario cut its small business rate on 1 July 2026 and no single published rate covers the whole year. On those figures, $100,000 pushed from the low rate to the general rate costs about $14,800 more a year. The federal part of the general rate is 15% after the general tax reduction, as the CRA’s corporation tax rates page shows. The calculator applies this passive income rule only if you fill in its investment income box, and it does not know about the taxable capital rule.
Is a holding company worth it for you?
Think of Dana, who owns a successful plumbing company in Saskatoon and parks a few hundred thousand dollars of extra cash in a holdco. The money earns interest, and the interest counts as passive income. If it stays under $50,000 a year, her plumbing company keeps its full limit. If a rental building gets added and the total crosses the line, the plumbing company pays more tax, even though nothing about the plumbing changed.
Only if the money sits in the company for years. A holdco lets an operating company pass its extra cash up without paying it out to you personally, and the cash can then be invested at the corporate level. Its real value is deferral, and deferral only pays if you don’t need the cash to live on.
Once you pay yourself, the personal tax comes due. The dividend tax calculator shows what a payout costs you in your province. And if you’re not earning much in the business, an RRSP or TFSA may do the job with no company at all, which you can test with the RRSP calculator.
Accounting fees for a second company are real. They depend on the accountant and the complexity of your holdings, so get a quote before you decide.
What should you check every year?
Add up what the holdco and any associated companies earned in interest, rent, dividends and taxable gains. Compare the total with $50,000. If you’re close, talk to your accountant before year end, since sometimes a sale or a payout can be timed to a better year. A five-minute look each autumn beats finding out in the spring that a good year cost you the low rate.
What mistakes do holding company owners make?
Letting passive income creep past $50,000 without noticing is the classic one. Watch it every year, because the loss of limit shows up in the tax return, not in your bank balance.
Another is treating every dividend between companies as tax free. It isn’t, when the payer isn’t connected. A third is ignoring the shareholder side. The company’s tax and your personal tax are separate bills, and you only see the whole picture when you add them up.
Our sources
Rates and thresholds come from the Canada Revenue Agency‘s corporation tax rates page and T2 Corporation Income Tax Guide, and from section 123.3 of the Income Tax Act. Provincial rates and the Ontario blend come from our corporate data file for 2026, which is derived where noted. Associated companies, taxable capital limits and credits aren’t modelled. This site isn’t connected to the CRA or any government.
Frequently asked questions
Are dividends between corporations taxed in Canada?
A dividend from a non-connected corporation faces Part IV tax at 38 1/3%. From a connected corporation, Part IV applies only if the payer gets a dividend refund.
When does passive income hurt the small business rate?
When adjusted aggregate investment income passes $50,000. The $500,000 business limit falls to nil at $150,000.
What counts as a connected corporation?
One your company controls, or one where it owns over 10% of the voting shares and over 10% of the fair market value.
Does a holdco reduce tax?
It mostly defers it. Once you take the money out personally, personal tax applies.
Is the capital gains inclusion rate 50% in 2026?
We believe so, because the planned increase to two-thirds was cancelled in March 2025, but we inferred the figure and did not find it printed on a CRA page.
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