Can You Benefit From The Loosened GRIP on CCPC Passive Income Tax?

The Federal government changed the rules in 2018 to limit the small business deduction (SBD) for Canadian Controlled Private Corporations (CCPCs) that have >$50K/yr of passive investment income. Ontario and New Brunswick have broken ranks and will not mirror those changes. That takes the teeth out of that tax-bite substantially. In fact, it could even mean a net benefit to some. This post describes how.

How The Corporate Active-Passive Income Threshold Works

A corporation’s active income (from providing goods and services) under $500K per year is usually subjected to the lower SBD tax rate. There is both a Federal and a Provincial SBD rate. With the new rules, when a corporation has an aggregate investment income over $50K/yr, the active income threshold shrinks by $5 for every $1 of passive income. That means whether a small business gets the deduction depends on both its active and passive income. It disappears with either a passive income over $150K or an active income over $500K.

The passive income of a year sets the active income limit for the following year. So, there is a time lag. For the purpose of the calculations in this post, I am assuming stable incomes. The income tax impact would be spread over two years. However, the concepts are complex enough so this enables a straight comparison over one year. It is for your own safety.

corporation investment income tax

Since Ontario and New Brunswick are not applying this passive income threshold, CCPCs that have under $500K active income (but over the corresponding passive income limit) pay a blended tax rate. They pay the Federal General Corporate rate at 15% plus the provincial SBD rate of 3.5% for Ontario or 2.5% for New Brunswick.

That defangs the tax bite substantially since the biggest jump from losing the SBD is at the provincial level. It gets even more interesting because of how GRIP is calculated.

GRIP allows a corporation to dispense eligible dividends to lower the personal tax rate.

GRIP stands for General Rate Income Pool and is part of tax integration. Tax integration is one of the pillars of our tax system. In this case, it means that earned-income should not be taxed twice. When over the passive-income threshold, extra corporate active income is taxed at the federal general rate.

That generates GRIP at 0.72 of that income and the eligible dividends paid to the owner are taxed at a lower rate. This is to account for the Federal tax already paid at the corporate level (about 28%). Normally, the net effect is still more tax paid than if someone earned the money directly.

ontario dividend tax

As seen above, in Ontario you pay about 2% more tax when flowing income through a corporation taxed at the General Rate and 0.5% more for a small business. It is not really a “tax break” as the simplistic tax critics often make it out to be when they focus only on the personal tax rate.

The New “Twisted GRIP” In Ontario & New Brunswick

I get a chuckle out of how when governments diddle with tax policy, hoping to accomplish one simplistic objective, they usually create a variety of unintended consequences. This then leads to another layer of rules to address those. It is like polypharmacy in medicine. The tax code has been made very complex from all of this tinkering over the years. This is no exception.

Ontario and New Brunswick do not have a separate GRIP calculation. It is the corporate income taxed at the Federal general rate that is used. So, we now have a situation where the tax in ON and NB for that income is 18.5% and 17.5% respectively on corporations hit by the passive income threshold. However, they generate GRIP as if they had paid the full Federal/Provincial combined rate of ~28%.

Not only is their corporate tax rate lowered, but they also still get to dispense personal eligible dividends. The net effect is a 2.2% lower tax rate in Ontario at the top tax bracket, as illustrated below.

corp income tax ontario

The net effect in New Brunswick is even larger.

New Brunswick has an even larger jump from the provincial SBD rate to the provincial general rate. A jump from 2.5% to 14%. They also tax larger corporations more than most – with a Federal/New Brunswick general rate of 29%. When that moves through the above-illustrated tax integration chart, it translates to a combined corp/personal tax rate of 46.64%. An absolute tax-savings of 6.66% compared to the usual personal top rate of 53.3%!!

Big-spending ON/NB business-owners benefit.

The above “dis-integration” of tax integration benefits those who are dispensing plenty of dividends from their CCPC to live on. Dispensing enough dividends releases the eRDTOH and nRDTOH from their corporate investment income. That results in a refund of the tax collected. All of the 38% tax for eligible dividend income. For other investment income, ~30% is refunded (~50% was collected), and this nRDTOH is only released when higher-taxed ineligible dividends are dispensed. To release the RDTOH requires a dividend of $2.61 for every dollar of RDOTH. That amounts to roughly equal the original investment income for eligible dividends and ~80% of the other investment income collected.

If you are affected by the passive-income tax rules, you must be earning somewhere between $50-$150K/yr of aggregate investment income. So, your corp needs to be passing-out $50-150K/yr of dividends to release all of the RDTOH, depending on the mix of eligible dividends and other investment income.

If you are spending enough money that you need to dispense dividends beyond what is needed to release the nRDTOH, then this tax-anomaly could benefit you. You can declare those extra dividends as eligible dividends instead of ineligible ones. That translates into up to a 2.2% saving in Ontario or 6.66% in New Brunswick for dollars in the top tax bracket. “Naughty-spendy-successful-New-Brunswicker-business-owners” in the top tax bracket will get the “Tax-Break-Of-The-Beast”.

Frugal folk are still penalized by the new tax rules – it is bad to be good. The tax rules still effectively push people to take money out of their corporations rather than continue with tax-deferred investing while above the threshold.

Examples of how some business owners benefit while others don’t.

A New Brunswick CCPC generates an active income of $250K. The corp also has $150K/year of investment income. That eliminates their Federal SBD with the new passive income tax rules. For simplicity in this example, that passive income is a combination of interest, foreign dividends, rental income, and the taxable half of capital gains. Those types of income generate nRDTOH that is released by dispensing not eligible dividends.

corporation tax saving strategy
Click the table to open in a second window.
For the thrifty owner, going over the passive income limit has a major impact on their taxes paid.

They jump from $91 120 to $104 870 (a combined rate jump from 22.78% to 26.22%). That is a 3.5% higher effective tax rate in absolute terms or a 15% increase in relative terms. Ouch!

They don’t benefit from the increased GRIP generated because if they pay out eligible dividends, then their nRDOTH doesn’t get refunded. Now, the GRIP doesn’t disappear. Someday they might use it if they decide to make a large pay-out that releases all of their nRDTOH with extra dividends on top of that. However, this represents a significant tax drag along the way.

The new passive income rules really stick it to those owners that spend well below their means and use their corporation to stockpile a big nest egg.

The moderately-spending owner also sees their tax rate go up (29% to 30%).

They cannot fully take advantage of the GRIP generated from the “twisted GRIP” without delaying the release of their nRDTOH.

They can give enough ineligible dividends to release the nRDOTH, but only enough eligible dividends to partially use their GRIP.

The net effect is a 1.26% increase in their overall tax rate. This is better than the 3.5% higher rate that would have resulted if New Brunswick had followed the Federal lead.

However, someone who dispenses enough dividends to fully take advantage of the GRIP generated can actually benefit from the tax change.

The spendy owner sees their combined tax rate drop from 43.35% to 40.38%.

They have already dispensed enough ineligible dividends to release their nRDTOH.

As more GRIP is generated, they can also use that to dispense more eligible dividends instead of ineligible ones.

The savings is 3% and not 6.66% because not all of the eligible dividends are taxed in the top tax bracket.

Also important to note is that they have more cash in their personal hands.

This cash is “worth more” in after-tax terms than the partially taxed money left in their corp.

Tax-deferral is still important: a spendy owner still pays more tax than a thrifty one.

Forty percent, instead of 26.22%. That leaves more partially-taxed money in the corporation to invest. The corporate tax-deferral advantage. So, it still doesn’t usually make sense to take out extra money solely to take advantage of this tax anomaly. However, you will eventually need to take the money out of the corporation and pay tax on it. If that is in the near-term, there may be a tax-planning opportunity here. I would definitely discuss that with my accountant.

How can frugal high-income CCPC owners take advantage of this?

Spend More

Well, one could buy a motorhome 😉 That will quickly increase your money-burn-rate and necessitate the mobilization of more corporate dividends. Seriously though, you could consider spending more money. Those affected by the passive-income limits have some combination of a high income and a large portfolio. Yes, the tax rate would go up (from 26% to 40% in the above example), and you would lose some of the corporate tax-deferred investment growth. However, you will need to pay tax eventually. If you think more broadly about your wealth, you may want to spend some money now to build your human capital for greater holistic wealth.

Top Up TFSAs & RRSPs

If you have unused RRSP or TFSA room, then consider taking out some extra eligible dividends at the lower rate to top up these other tax-sheltered account types. This can provide better diversification against legislative risk. The government is much more likely to target things like corporations than accounts that the average Joe understands and uses (such as an RRSP). Also, a combination of RRSP and TFSA in conjunction with a corporation is often better in the long-term. Try entering your numbers in my Corp vs RRSP vs TFSA simulator. Consider using a spousal RRSP for income-splitting.

Help a Lower-Income Spouse To Invest More

Take out some of the extra eligible dividends to help the high-income spouse pay for all living expenses and TFSA contributions. That will leave more of the low-income spouse’s money to invest.

Ensure that the low-income spouse gets their income paid directly into their own separate personal bank account. Next, they use that money to contribute to their own personal taxable investment account. By keeping a clean trail of where the money came from, that investment income can be attributed to their lightly-taxed hands. If they don’t earn any income, you may even consider a spousal loan.

Use other strategies to bring down corp aggregate investment income.

This can include maximizing the use of RRSPs and TFSAs to divert investment income from the corporation. Generally, a good idea as already mentioned. Paying salary to build more RRSP room also lowers corporate active income.

Organizing your overall portfolio in a tax-efficient way that directs high-tax-high-yield income to an RRSP, TFSA, or personal taxable account. Online banking with ETFs and the Robocorp portfolio-building tool make that easy. This attempt at optimizing asset location can make a big difference, in light of the new passive income tax rules. I will illustrate this with an example in my next post.

Is this for real?

I really am a doctor and not an accountant. Here are some articles from accounting firms in Ontario and New Brunswick that also describe what I am talking about here. If I am wrong, I am in good company.

I used New Brunswick for the examples in this post because the effects are largest and most consistent there. This is due to the huge tax increase on general corps compared to small businesses. Further, in New Brunswick, the top net personal rate on eligible dividends is 33.5%. This makes dispensing as many eligible dividends as you can very beneficial.

In practical terms, the effect in Ontario is also attenuated by the high taxation of eligible dividends personally (39.5% top rate) compared to in a corporation (38.33%). That makes it a disadvantage to dispense more eligible dividends above what you need to live on. I’ll use Ontario examples in my next post where I look at the benefit of locating eligible-dividend-paying stocks/ETFs in a corporate account.

Will it last?

This tax policy from New Brunswick may actually attract some physicians to New Brunswick for those who are tax-savvy. True confession: My wife and I visited Fredericton this past spring to seriously consider it. We are well established in Ontario, but it was tempting. The favorable treatment of eligible dividends (we have a large portfolio), climate (we like snow), and a more relaxed culture (we are pretty chill) were all attractive. In the end, proximity to our family and friends won out. However, for a physician starting out, this is attractive. It would be a short-sighted move by New Brunswick to change this.

While this tax-dis-integration was likely unintended, it does still accomplish the government’s goal. There is an incentive to move money out of a CCPC when it starts to have too much passive income. The economy benefits from business owners that spend the fruits of their labors rather than save it all. Of course, I suspect that they would rather be using a stick than a carrot. This situation could always change by adding new and even more complex rules (causing more unintended consequences). In the mean-time, eat the carrots.


  1. Is my take right?
    – To get about 50k/yr in passive returns, at ~2% average dividend rate in a diversified couch potato portfolio, you’ll need ~2.5mil in corporate etf assets?
    – at which point it only affects the active income small business rate, and in a linear fashion, assuming salary payment doesn’t decrease active income below the new lowered active income threshold

    So the effect of passive income on the corp small business deduction only affects people with corp portfolios that are either balanced and >2mil, or if they are dividend heavy and still prob ~1mil?
    And they must also be making more than 500k active income? (could be less if passive income is >>50k)

    1. Hey Stevie,

      Yep. Your take is correct. You can build a large portfolio before hitting the limit. Even larger if you use RRSPs, TFSAs, and asset location strategies. Even larger if you throw in some corporate class ETFs. Plus, if you pay out enough salary, the limit is higher. There are many ways to deal with it. In general, it affects those who save large amounts (to make enough passive income) without spending (spending could be done with salary and lower active income plus decreases the amount saved). There are ways to deal with it investment type or location wise. Personally, when there is that much saved plus still earning active income, I have chosen the option to work less and spend more.

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