# Holding investments in a corporation

> How a CCPC's investment income is taxed, how part of that tax comes back when dividends are paid, and how passive income can shrink the business limit.

- Web page: https://taxnotes.ca/guides/passive-investment-income/
- For: Corporations · Topic: Running a corporation
- Last reviewed: 2026-10-10

Your corporation can invest profits it doesn't need in the business, but investment income in a Canadian-controlled private corporation (CCPC) doesn't get the small business rate. Part of the tax on it is refunded when the corporation pays taxable dividends, and if there's enough of it, it can shrink the small business deduction on your business income too.

## Investment income isn't business income

The [small business deduction](https://taxnotes.ca/guides/small-business-deduction/) applies only to active business income. When a corporation works out that amount, it takes out income from property (such as interest, rents and royalties), net taxable capital gains, and dividends it can deduct. A business whose main purpose is earning income from property, such as one that mainly collects rent, is a "specified investment business". Its income doesn't qualify either, unless the corporation employs more than five full-time employees in it throughout the year.

On top of its regular tax, a corporation that's a CCPC throughout the year pays an additional refundable tax on its investment income (other than dividends it can deduct).

## Part of the tax comes back when you pay dividends

A private corporation tracks refundable taxes in two accounts, called refundable dividend tax on hand:

- **Non-eligible account (NERDTOH):** gets the refundable portion of the Part I tax a CCPC pays on its investment income, plus some Part IV tax.
- **Eligible account (ERDTOH):** gets Part IV tax the corporation pays on certain dividends it receives, such as eligible dividends from corporations it isn't connected with.

When the corporation pays taxable dividends to its shareholders, it can claim a dividend refund from these accounts. Eligible dividends get a refund only from the eligible account. Non-eligible dividends draw on the non-eligible account first, then possibly the eligible one. The refund is limited to a set share of the dividends paid and to the account balance.

To get the refund, the corporation has to actually pay the dividend (in cash or other assets) unless it's a deemed dividend, and file its return within three years after the end of the tax year. After that, the refund is statute-barred and won't be issued.

In practice, part of the corporate tax on investment income is only recovered once profits are paid out to shareholders as taxable dividends. For how those dividends are taxed in your hands, see [Paying yourself: salary or dividends?](https://taxnotes.ca/guides/salary-vs-dividends/)

## Capital gains and the capital dividend account

Only part of a capital gain is taxable. The tax-free part, net of the non-deductible part of capital losses, goes into the corporation's capital dividend account (CDA), along with certain life insurance proceeds and capital dividends it receives from other corporations.

A private corporation can pay out its CDA balance as a capital dividend, which is tax-free to shareholders resident in Canada. To do that, it files an election (Form T2054) by the day the dividend becomes payable or is paid, whichever is earlier; a late election is possible with a penalty. If the corporation elects more than its CDA balance, it owes an extra tax on the excess, unless it elects, with the shareholders' agreement, to treat the excess as an ordinary taxable dividend.

## Passive income can shrink the business limit

A CCPC's business limit is reduced when the adjusted aggregate investment income (AAII) of the corporation and its associated corporations goes over a threshold. The reduction grows on a straight-line basis, and the limit drops to nil once AAII passes a higher threshold. The thresholds are in the CRA's T2 guide (linked in the sources).

A few points about how it works:

- **It looks back a year.** The reduction for a tax year is based on AAII for the tax years that ended in the previous calendar year, so a large investment gain this year affects next year's limit.
- **AAII is roughly net investment income.** It includes interest, rents, dividends from corporations it isn't connected with and other income from property, and net taxable capital gains. It leaves out dividends from connected corporations and income from property used in or incidental to the active business.
- **Gains on active assets don't count.** That includes property used mainly in an active business carried on mainly in Canada by the corporation or a related CCPC, and certain shares of connected corporations.
- **It's not added to the capital test.** If the corporation also has a reduction for taxable capital, only the larger of the two applies.
- **Moving investments won't avoid it.** If a corporation transfers or lends property to a related corporation it isn't otherwise associated with, partly to lower its AAII, the two are treated as associated for this rule.

Business income above the reduced limit doesn't get the small business rate. You can compare the rates on the [corporate tax rates table](https://taxnotes.ca/rates/corporate-tax/).

## In short

- Investment income in a CCPC is taxed separately from business income, with part of the tax refundable when taxable dividends are paid.
- The tax-free part of capital gains can be paid out as tax-free capital dividends, but only with an election.
- Investment income above a threshold, measured the year before, reduces the business limit for the corporation and its associated corporations.
- These rules interact, so get professional advice before building up large investments inside the corporation.

## Sources

1. [T4012 T2 Corporation – Income Tax Guide, Chapter 4: Page 4 of the T2 return (small business deduction)](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4012/t2-corporation-income-tax-guide-chapter-4-page-4-t2-return.html) (canada.ca)
2. [T4012 T2 Corporation – Income Tax Guide, Chapter 6: Pages 6 and 7 of the T2 return (refundable taxes and dividend refund)](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4012/t2-corporation-income-tax-guide-chapter-6-pages-6-7-t2-return.html) (canada.ca)
3. [T4012 T2 Corporation – Income Tax Guide, Chapter 7: Page 8 of the T2 return (refundable tax on a CCPC's investment income)](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4012/t2-corporation-income-tax-guide-chapter-7-page-8-t2-return.html) (canada.ca)
4. [Small business deduction rules (passive investment income)](https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/budget-2018-equality-growth-strong-middle-class/passive-investment-income/small-business-deduction-rules.html) (canada.ca)
5. [Income Tax Folio S3-F2-C1, Capital Dividends](https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plan-folio-2-dividends/income-tax-folio-s3-f2-c1-capital-dividends.html) (canada.ca)

Tax figures in this guide come from the TaxNotes.ca rates tables (https://taxnotes.ca/rates/), which cite the Canada Revenue Agency and, for Quebec, Revenu Québec.

Last reviewed: October 10, 2026

How to cite: "Holding investments in a corporation", TaxNotes.ca, last reviewed 2026-10-10, https://taxnotes.ca/guides/passive-investment-income/. For a figure or rule, also cite the official source listed above.

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