Jared Pilon
Understanding corporate taxation
In Alberta, Canadian Controlled Private Corporations (CCPCs) attract tax on earnings up to $500,000 at a rate of 11% on active business income.
Unfortunately, rental income is typically not viewed the same and is instead subject to a combined federal & provincial tax rate of 46.67% in Alberta.
Rental income, along with certain interest royalty and other ‘passive’ income amounts are classified as ‘Specified Investment Income’ and are taxed differently within the Income Tax Act.
A portion (30%) of the high-rate tax is refundable to the corporation when corporate profits are ultimately paid out to shareholders. After distribution of profits, the corporation is left with paying tax at a net tax rate of 16%.
While the spread between the active income rate (11%) and the specified investment income rate, less the refundable portion, (16%) is not significant, this requires shareholders to draw income from the corporation when they may otherwise want to use the funds to grow the real estate holdings within the corporation.
Is there a way to avoid paying high-rate tax (46.67%) and have more after-tax profits available for real estate expansion plans?
How to pay less tax on corporate rental income
Yes, the determining factor is in the number of full-time employees that your corporation has. To gain access to the small business tax rate, your real estate investment corporation would need to have 6 or more full-time employees.
Of course, this exemption is not going to be readily available for all corporations to take advantage of. You would likely need a sizable real estate portfolio to justify hiring 6 or more full-time workers.
If you are, however, in a position where you might be getting close to have 6 employees, it might be wise to review your operations to see if you could internalize certain services.
These could include:
- Handyman/repair work
- Administrative duties
- Marketing/advertising
- Property management services
- Security
If you are able to make the switch and move some of these external services into internal roles in the corporation, it is important to document the work completed by these individuals should CRA challenge your small business tax rate claim in the future.
Gaining access to lower tax rates is always beneficial for corporations. If you have specific questions related to your rental corporation, please feel free to reach out to us at .
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Posted: 8/24/23
