76  /

Integration—Cost and Benefit of Incorporation 

Notes, continued

(2)  In some circumstances, it is possible to defer the payment of tax at the individual level by 

using a corporation to earn income that is not immediately paid out to the shareholder. The 

lower part of the table above summarizes the 2013 tax deferral or pre-payment potential 

of earning income through a corporation, based on the same types of income and on the 

same assumptions outlined in note (1).

(3)  Dividends (both eligible and non-eligible) received from taxable Canadian corporations 

are deductible in computing Part I tax and are therefore treated differently from other 

investment income.

 

 Dividends received by CCPCs from unconnected corporations, or from connected 

corporations that receive a dividend refund on the payment of the dividend, are subject to 

Part IV tax, calculated at a rate of 33

1

/

3

% of the dividend amount. Part IV tax is a refundable 

tax that is included in the corporation’s Refundable Dividend Tax on Hand (RDTOH) 

account. When taxable dividends (either eligible or non-eligible) are subsequently paid by 

the corporation to its shareholders, a dividend refund equal to the lesser of 33

1

/

3

% of the 

dividends paid and the balance in the RDTOH account is refunded to the corporation.

 

 Private corporations that are not CCPCs, and certain closely held public companies, must 

also pay Part IV tax on dividends they receive from taxable Canadian corporations, and may 

also receive a dividend refund when they subsequently pay dividends to their shareholders. 

Other public companies and their subsidiaries are not subject to this tax and therefore do 

not receive a dividend refund when they subsequently pay dividends to their shareholders.

 

 There is no difference between earning Canadian dividend income (both eligible and non-

eligible) through a corporation as opposed to earning it directly, as all corporate level tax on 

such income is refundable. However, there is a potential for a tax deferral or pre-payment 

based on the difference between the top individual marginal rate applicable to dividend 

income and the refundable Part IV tax rate of 33

1

/

3

%.

Current as of September 30, 2013

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