Holding rental property in a corporation changes how the rent is taxed, what happens when you sell, and how income paid to relatives is taxed. This page covers the tax side: when rent is investment income in a corporation, the refundable tax, the passive income grind on the small business deduction, capital gains and the capital dividend account, moving properties you already own, and the tax on split income (TOSI). It is part of WealthNorth’s real estate tax hub. Mortgages, setup costs and liability are covered in real estate investing in a corporation.
How rent is taxed in a corporation
A corporation whose business is mainly earning rent or other income from property has a specified investment business, so that income is taxed as investment income rather than at the small business rate, unless it employs more than 5 full-time employees in the business throughout the year (or an associated corporation provides services that would otherwise need that many).For a Canadian-controlled private corporation (CCPC), that means:
| Rate or amount | |
|---|---|
| Federal tax on investment income | 38 2/3%, including an additional refundable tax of 10 2/3% |
| Provincial general rate, outside Quebec | 8% to 15% |
| Combined | about 46.7% to 53.7% |
| Refundable portion | An amount equal to 30 2/3% of the investment income, refunded at 38 1/3% of the taxable dividends the corporation pays |
For a corporation, the specified investment business test above, from section 125 of the Income Tax Act, decides whether rental income can be active business income. Airbnb tax rules covers short-term rentals.
Why there is little tax deferral
Because part of the corporate tax is refunded only when dividends are paid, profit kept in the corporation has been taxed at roughly the combined rate above.
Example (hypothetical figures), $50,000 of net rent in a CCPC, using the rounded 50% combined rate:
| Step | Amount |
|---|---|
| Corporate tax at about 50% | about $25,000 |
| Left in the corporation if nothing is paid out | about $25,000 |
| Refundable when enough taxable dividends are paid (30 2/3% of the income) | about $15,333 |
| Personal tax on the dividends | Depends on the shareholder’s income and province |
Whether that is more or less than you would pay holding the property yourself depends on your personal marginal rate; real estate investing in a corporation compares the two, and the tax brackets page shows personal rates.
The passive income grind on the small business deduction
This only matters if the corporation, or one associated with it, also earns active business income, for example an incorporated consultant who holds rentals in the same company.
The small business deduction, which brings the federal rate down to 9%, is available only to a corporation that was a Canadian-controlled private corporation (CCPC) throughout the year, and only on active business income carried on in Canada up to a $500,000 business limit that associated corporations share; the limit shrinks when the group's passive investment income is over $50,000 (reaching zero at $150,000) or its taxable capital is over $10 million.Rental income counts toward that investment income: the CRA lists “the corporation’s total income for the year from property” in adjusted aggregate investment income, “income from a specified investment business carried on by it” (CRA, small business deduction rules). Taxable capital gains count too, other than gains on property that is an active asset of the corporation, so a year with a rental property sale can shrink the next year’s business limit.
How the business limit shrinks (hypothetical levels of investment income in the previous year):
| Adjusted aggregate investment income | Reduction to the business limit | Business limit left |
|---|---|---|
| $50,000 | $0 | $500,000 |
| $70,000 | $100,000 | $400,000 |
| $100,000 | $250,000 | $250,000 |
| $150,000 | $500,000 | $0 |
What it costs (hypothetical figures). A consulting corporation earns $400,000 of active business income and had $80,000 of rental investment income the year before. Its business limit falls by ($80,000 − $50,000) × 5 = $150,000, to $350,000. The $50,000 of active income above that limit is taxed at the federal general rate of 15% instead of the small business rate of 9%, which adds $3,000 of federal tax; the provincial difference depends on the province.
Because the reduction uses the investment income of the corporation and its associated corporations, moving the rentals into a separate holding company that is associated with the operating company doesn’t avoid it. Rentals held personally are outside the corporate group. Passive income in a corporation covers the grind for other investments.
Selling a property held in the corporation
When the corporation sells a rental property for more than its cost, the taxable part of the gain is investment income taxed at the rates above, and the CCA it claimed on the building can be recaptured: When you sell a rental building for more than its undepreciated capital cost (UCC), the difference, counting the sale price only up to the building's original cost, is recaptured CCA and added to your income in full; a sale above the original cost is also a capital gain, and if no property is left in the class and some UCC remains, that remainder is a terminal loss you deduct.
The non-taxable part of the gain goes into the capital dividend account (CDA). The rules, from the CRA’s Income Tax Folio S3-F2-C1:
- Only a private corporation can pay a capital dividend; a public corporation can't, even if it was once private.
- The account includes the non-taxable part of the corporation's capital gains, in excess of the non-deductible part of its capital losses (including business investment losses).
- It also includes life insurance proceeds on certain policies and capital dividends received from other corporations.
- A capital dividend is tax-free to Canadian-resident shareholders: no part of it is included in their income.
- The corporation elects on Form T2054 by the earlier of the day the dividend becomes payable and the day any part of it is paid.
Rent itself adds nothing to the account.
Example (hypothetical figures): the corporation sells a rental property with a $400,000 capital gain.
| Step | Amount |
|---|---|
| Taxable capital gain (50% inclusion) | $200,000 |
| Added to the capital dividend account (the non-taxable part) | $200,000 |
| Corporate tax on the taxable gain at about 50% | about $100,000 |
| Refundable when taxable dividends are paid (30 2/3% of the taxable gain) | about $61,333 |
A capital dividend is tax-free to Canadian-resident shareholders: no part of it is included in their income. The rest of the after-tax proceeds reaches shareholders as taxable dividends. The same sale made personally is covered in capital gains on rental property.
Moving properties you already own into a corporation
Transferring a rental property you own to your corporation is a disposition, so the accrued capital gain and any recapture of CCA can become taxable. The CRA’s rental guide says: “You can also defer a capital gain or recapture of CCA when you transfer rental property to a corporation or a partnership”, pointing to its circular on transfers to a corporation under section 85 of the Income Tax Act (CRA Guide T4036). The deferral doesn’t cover the other costs of a transfer: provincial land transfer tax where it applies (see the land transfer tax calculator), legal fees, and discharging or refinancing the mortgage, which real estate investing in a corporation covers.
Paying income to family members
Paying dividends from a rental corporation to a spouse or adult children is limited by the tax on split income:
Since 2018, the tax on split income (TOSI) also applies to adults: dividends or interest (not salary) and certain capital gains that a family member gets from a private corporation's related business are taxed at the top marginal rate unless an exclusion applies. The main exclusions: the person is actively engaged in the business (on average at least 20 hours a week in the year or any five earlier years); at 25 or older, they own excluded shares or get a reasonable return for their work, property and risk; from 18 to 24, the amount is a safe harbour capital return or a reasonable return on arm's-length capital they contributed; or the amount would be excluded for their spouse or common-law partner aged 65 or older.When a corporation tends to fit
| Situation | Why |
|---|---|
| The rental operation has enough full-time employees | Exception to the specified investment business rule: It isn't one if the corporation employs more than 5 full-time employees in the business throughout the year. |
| Development, renovation or management run as a business | Income from an active business can qualify for the small business deduction |
| Liability or estate planning is the main goal | The corporation, not you, owns the property; the trade-offs are on real estate investing in a corporation |
| You also run an active business in a corporation | Keeping rentals out of that corporate group avoids the passive income grind described above |
For a few residential rentals, the comparison weighs the tax points above against the corporation’s extra accounting, filing and mortgage costs; an accountant who works with real estate corporations can run the numbers for a specific portfolio.
Related articles
Sources
The figures and rules on this page come from these sources, last checked against them between September 23, 2026 and October 1, 2026. How we check facts.
- Canada Revenue Agency: Corporation tax rates
- Canada Revenue Agency: T2 Corporation – Income Tax Guide – Chapter 7: Page 8 of the T2 return
- Canada Revenue Agency: Dividend refund rules
- Canada Revenue Agency: Small business deduction rules
- Canada Revenue Agency: Income Tax Folio S3-F2-C1, Capital Dividends
- Canada Revenue Agency: Capital Gains – 2025
- Canada Revenue Agency: Rental Income
- Canada Revenue Agency: Guidance on the application of the split income rules for adults
- Canada Revenue Agency: Line 40424: Federal tax on split income
- Government of Alberta: Tax, levy, and prescribed interest rates | Alberta.ca
- Justice Laws (Canada): Income Tax Act