Calculator
What is passive income costing your corporation?
Two numbers most owners have never seen side by side: the tax on money invested inside the corporation, and the small business rate it quietly takes away.
Money invested inside a corporation is taxed harder than most owners expect, and the damage comes in two separate places. First, passive investment income is taxed at over 50 percent up front. Second, once that passive income passes 50,000 dollars in a year, it quietly starts grinding away the small business rate on the income the business actually earned. This calculator shows both, and separates the tax that comes back from the tax that does not.
The drag, in two parts
| Corporate tax paid up front on passive income (50.17 percent) | |
| Refundable portion (30.67 percent), recovered as dividends are paid out | |
| Permanent corporate tax cost after refunds (19.50 percent) | |
| Small business limit ground away by passive income | |
| Small business limit remaining | |
| Extra federal tax from the grind this year | |
| Total annual tax drag (permanent passive cost plus grind) |
The refundable portion is real money back, but only as dividends are actually paid to you, and those dividends are then taxed in your hands. The grind is the quieter problem: it taxes this year's operating income at a higher rate because of last year's investing decisions. Structures exist that earn investment returns inside a corporation without creating passive income in the first place, and the comparison is worth a conversation before the portfolio grows another year.
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Methodology and assumptions
Passive income rate. Investment income earned by a Canadian controlled private corporation in Ontario is taxed at a combined 50.17 percent for 2025: a federal rate of 38.67 percent, which includes the additional refundable tax, plus Ontario's 11.5 percent. Of that, 30.67 percentage points are refundable: the amount is tracked in the corporation's refundable tax pools and returned through the dividend refund mechanism, at 1 dollar of refund for every 2.61 dollars of taxable dividends paid (a 38.33 percent refund rate on dividends paid). The permanent, non refundable cost is therefore 19.50 percent, and that is the figure used in the total.
Small business rates. Active business income up to the 500,000 dollar business limit is taxed at a combined 12.2 percent in Ontario for 2025 (federal 9 percent, Ontario 3.2 percent). Income above the limit is taxed at the general combined rate of 26.5 percent.
The grind. Federally, the business limit is reduced by 5 dollars for every 1 dollar of adjusted aggregate investment income (AAII) above 50,000 dollars in the prior year, and is fully eliminated at 150,000 dollars of AAII. Ontario does not parallel the federal passive income grind, so the extra tax from the grind is calculated here using only the federal differential of 6 percentage points (federal general rate 15 percent minus federal small business rate 9 percent), applied to the lesser of the ground amount and the active business income you entered. The passive income you entered is used as the approximation of AAII; the real AAII definition adjusts for several items, including how taxable capital gains and losses are counted.
What is not modelled, stated plainly: the personal tax on dividends when the refundable portion is recovered (integration is close but never perfect, and the personal side depends on your other income); the capital dividend account, which can pay some gains out tax free; losses carried forward or back; the timing lag of the grind, which is based on the prior year's AAII; instalments and interest; and any planning structure. For context only: the same interest income earned personally by an Ontario resident in the top bracket is taxed at 53.53 percent for 2025. Figures are educational estimates for Ontario corporations in 2025, not a tax filing and not financial advice.
Sources: Canada Revenue Agency corporate tax rates and small business deduction reduction rules for Canadian controlled private corporations; Ontario corporate tax rates for 2025; Income Tax Act provisions on refundable taxes and the dividend refund (sections 129 and 123.3 concepts, described in plain language).
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