Many clients ask how to reduce their tax burden, and that conversation often leads to deeper discussions about family wealth, estate structure, and cross-border implications. Understanding Canadian tax basics helps avoid unnecessary tax, prevent family disputes, and reduce the risk of unpleasant surprises at death or during corporate restructuring. Even well-informed business owners frequently hold misconceptions. Below are some of the most common foundational rules.
1. Inheritance Tax: What Actually Happens in Canada
Canada does not levy an inheritance tax. Instead, the Income Tax Act applies a deemed disposition at death. This fictional sale treats all capital property as though it were sold at fair market value immediately before the person’s death.
The rule matters because unrealized capital gains become taxable in the final return. Cash sitting in a bank account is already after-tax and therefore produces no further income tax at death. Capital assets with accrued gains do.
For example:
• Someone holding only cash, even a very large amount, pays no income tax directly at death.
• Someone holding highly appreciated property can owe substantial tax even with a much smaller net worth.
Registered funds such as RRSPs or RRIFs are fully included in income on death unless rolled to a qualifying spouse or dependent. Proper planning can mitigate this, but the principle remains: accumulated untaxed growth is what triggers tax, not the size of the estate itself.
Estate planning that accounts for this rule helps families preserve both wealth and relationships.
For a deeper look at estate rules, see our post on Changes to Trust Reporting in Canada, which explains new reporting duties that may affect many estates.
2. Probate Tax in Canada (Estate Administration Tax)
Probate tax is a provincial levy, not a federal one. In Ontario, the Estate Administration Tax is approximately $15,000 on the first $1 million of estate value.
Not all assets require probate. Shares of a private corporation and certain jointly held assets may avoid it. A common planning tool is the use of multiple wills, where one will governs probatable assets and the other governs non-probatable assets.
This strategy can significantly reduce probate costs for entrepreneurs and family-owned corporations.
You can review exact probate fee estimates using the Ontario government’s official Estate Administration Tax calculator, which outlines the current rates and calculation rules.
3. How Canada Taxes Corporate Income
Corporate taxation depends on:
- Whether the corporation is a Canadian-Controlled Private Corporation (CCPC)
- Whether income is active or passive
- Whether the corporation earns capital gains
- Whether the corporation is a non-CCPC, which introduces cross-border implications
3A. Tax on Active Business Income (CCPCs)
A Canadian corporation is a CCPC when Canadians control it. A CCPC earning active business income gets a low tax rate. Ontario taxes the first $500,000 of active income at about 15.5%. This benefit is called the small business deduction. Income above that limit is taxed at 26.5%. Higher-rate income adds to the corporation’s GRIP account. GRIP allows the company to pay eligible dividends. Eligible dividends face lower personal tax.
Passive income faces different rules. Passive income includes interest, portfolio gains, or passive rental income. Ontario taxes passive income in a CCPC at over 50%. Part of this tax becomes RDTOH. RDTOH is refunded when the corporation pays taxable dividends. This system prevents tax deferral through passive corporate investing. It keeps passive income from receiving low corporate rates. Individual top rates are usually much higher.
A non-CCPC does not face these passive income rules. A non-CCPC pays 26.5% on passive income. This difference can create planning opportunities. Plans must consider that eligible dividends cannot go to non-residents. Converting between CCPC and non-CCPC status carries serious consequences. These changes require careful analysis.
4. Capital Gains Realized by a Corporation
When a corporation realizes a capital gain, only half of the gain is taxable (as is the case when an individual realizes a capital gain). This is sometimes described as a “50% inclusion rate”. This does not mean that the tax rate is 50%. It just means that if you sell something for $1 million more than what you bought it for, only $500,000 of the $1 million is subject to tax at whatever tax rate applies. In the case of a corporation, the half portion of the gain that is taxable is subject to the investment tax rates (the same rate that applies to passive rental income, for example). This means that, once again, a corporation will pay over 50% tax (on only the taxable half of the gain), and will generate RDTOH (the refundable tax described above). The non-taxable half of the capital gain forms another tax account called the “capital dividend account”, or “CDA”. Where a company has a CDA balance, it can declare a “capital dividend”, which is a tax-free dividend.
In summary, a corporation will pay tax up-front of about 25% (approximately 50% of the 50% of the gain that is taxable). That is $250,000 of tax upfront on a $1 million capital gain. Half of the capital gain can be extracted tax-free via capital dividends to the shareholders. The other half is taxable, but part of the tax is ultimately refundable on the declaration of taxable dividends by the corporation.
Note again, that the non-CCPC discussion above also applies for capital gains. As you can imagine, there could be significant planning opportunities available in this context as well.
5. Inter-Corporate Dividends
Inter-corporate dividends are typically tax-free when paid between connected corporations. A corporation receiving a dividend must own more than 10% of the votes and value of the payer to meet the “connected” test under subsection 186(4) of the Income Tax Act.
This rule enables common estate-freeze structures, holding companies, and multi-corporation planning used in succession, family trust structures, and cross-border reorganizations.
6. How Shareholders Are Taxed When Extracting Money
The corporate income tax is not really the end of the story. Now we have to get the money out of the company (sometimes), and into the hands of the shareholders. Generally speaking, when funds are extracted by the shareholders from a company, the shareholders must pay tax. Typically, money is extracted as a dividend, a salary, or a fee of some sort. The shareholder then must pay tax on amounts extracted at the shareholder’s marginal tax rate. Although there are, therefore, two levels of tax, this does not generally give rise to “double taxation” in the sense that the same money is being taxed twice. The corporate tax system is designed to achieve (ideally) “integration”, so that the end tax result after withdrawing the money from the company is the same as it would have been if the shareholder had earned the money directly (i.e., not through a corporation) and paid tax thereon.
In some cases, there may be opportunities to extract money from a corporation tax-free (such as through an “84.1 pipeline”). These circumstances are somewhat limited, but one should take advantage of doing so when possible.
My general rule is that there is usually a way to pay less tax. You just have to know the rules and use them to your advantage. That’s why they are there (at least from my perspective.)