Corporate tax, line by line.
Your accounting profit is almost never your taxable income. This walks the whole reconciliation — the add-backs, the deductions, the small business deduction and its grinds — then shows you which of the tax you just calculated is gone for good, and which of it comes back.
Start with one number: profit before tax.
Put your net income from the financial statements — before income tax expense — in the first box, then work down. Everything recalculates as you type, and every line you don’t have can stay at zero. The less common adjustments sit behind “more items” so the common path stays short.
Book profit, plus what the Act won’t let you deduct, minus what it lets you deduct that accounting doesn’t.
Active business income taxed at 11%, income over the limit at 27%, investment income at 50.67%.
Some of that tax is permanent. Some is only on deposit — and comes back when you pay a dividend.
1 Start with accounting profit
From the financial statements
book basis| Net incomeBefore income tax expense | $ |
2 Reconcile to net income for tax purposes
On the left, expenses the Act denies in whole or in part. On the right, deductions tax allows that accounting didn’t — and reversals of book-only amounts.
Add back
denied for tax| Amortization & depreciations.18(1)(b) — replaced by CCA | $ |
| Meals & entertainments.67.1 — enter total spend, 50% is denied | $ +$6,000 added back |
| Club dues, golf & membershipss.18(1)(l) — 100% denied | $ |
| CRA interest, penalties & finess.18(1)(t), s.67.6 | $ |
| Life insurance premiumss.18(1)(a) — unless collaterally assigned | $ |
More add-backs
| Reserves & contingent liabilitiess.18(1)(e) — incl. warranty accruals | $ |
| Stock-based compensations.7(3)(b) | $ |
| Remuneration unpaid after 180 dayss.78(4) — the owner-bonus trap | $ |
| Unrealized loss on investmentsBook only — not yet realized | $ |
| Book loss on asset disposalReversed — tax result comes in separately | $ |
| Other add-backs | $ |
| Taxable capital gain50% of realized gains, from step 3 | $7,500 |
| Total added back | $54,650 |
Deduct
allowed for tax| Capital cost allowanceSchedule 8 — the tax version of amortization | $ |
| Book gain on asset disposalReversed — replaced by the taxable capital gain | $ |
| Unrealized gain on investmentsBook only — not taxable until realized | $ |
More deductions
| Prior-year unpaid remuneration, now paids.78(4) reversal | $ |
| Other deductions | $ |
| Total deducted | $65,000 |
3 Characterise the investment income
These amounts are already inside your book profit. They sit here because tax treats each one differently — and because they drive the small business deduction grind, the refundable pools and the capital dividend account further down.
Investment income
tax basis| Interest, foreign & other portfolio income | $ |
| Capital gains realizedGross — half taxable, half to the CDA | $ $7,500 taxable · $7,500 to CDA |
| Aggregate investment income | $16,500 |
Dividends received
portfolio| Eligible dividendsFeeds ERDTOH via Part IV tax | $ |
| Non-eligible dividendsFeeds NERDTOH via Part IV tax | $ |
| Deducted again under s.112 | $4,000 |
4 Get to taxable income, and size the small business deduction
Division C deductions
to taxable income| Charitable donationss.110.1 — capped at 75% of net income | $ |
| Non-capital losses applieds.111 carryforward | $ |
| Dividends received deductions.112 — from step 3 | $4,000 |
| Total Division C | $6,500 |
Business limit grinds
greater of, not both| Taxable capital of the associated groupGrinds between $10M and $50M | $ no reduction |
| Group AAII, prior-year basis$5 of limit lost per $1 over $50,000 | $ no reduction |
| Business limit available | $500,000 |
∑ The reconciliation
From the financial statements to the tax return, in one column.
| Net income per financial statements | — |
| Add: Schedule 1 add-backs | — |
| Add: taxable capital gain | — |
| Less: Schedule 1 deductions | — |
| Net income for tax purposes | — |
| Less: Division C deductions | — |
| Taxable income | — |
How that income is taxed — and how much of the tax comes back
Tax on active business income is permanent. Tax on investment income is largely refundable — held by CRA until you pay a dividend.
| Income type | Amount | Rate | Tax | Permanent | Refundable |
|---|---|---|---|---|---|
| Active business income within the limit | — | 11.00% | — | — | — |
| Active business income above the limit | — | 27.00% | — | — | — |
| Aggregate investment income 30⅔% of the income is refundable |
— | 50.67% | — | — | — |
| Portfolio dividends — Part IV tax 100% refundable |
— | 38⅓% | — | — | — |
| Total corporate tax | — | — | — |
What you actually keep paying
Of the total corporate tax above, this is the part that never comes back — and the part that is only on deposit.
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5 NERDTOH, ERDTOH and the refund
The refundable tax from the table above doesn’t come back automatically. It sits in one of two notional accounts and is released only when you pay a dividend — at 38⅓¢ for every dollar distributed. The two pools behave asymmetrically.
NERDTOH non-eligible
Fed by the refundable portion of Part I tax on investment income — 30⅔% of AAII — plus Part IV tax on non-eligible dividends received.
| Opening balance | $ |
| + Refundable portion of Part I tax | — |
| + Part IV on non-eligible dividends | — |
| Available | — |
| − Refund claimed | — |
| Closing NERDTOH | — |
ERDTOH eligible
Fed only by Part IV tax on eligible dividends received from non-connected corporations. Nothing from your own operations ever lands here.
| Opening balance | $ |
| + Part IV on eligible dividends | — |
| Nothing else feeds this pool | — |
| Available | — |
| − Refund claimed | — |
| Closing ERDTOH | — |
Dividends paid out this year
triggers the refund| Non-eligible dividends paidThe usual kind, from SBD-rate income | $ |
| Eligible dividends paidRequires a GRIP balance | $ |
| Dividend refund released | $6,593 |
Clearing the pools
what it takesA refund is released at 38⅓¢ for every dollar of taxable dividend paid. Working backwards, this is the dividend it would take to empty each pool completely.
| To release | Dividend required | Refund it frees |
|---|---|---|
| NERDTOH —Paid as a non-eligible dividend | — | — |
| ERDTOH —Needs an eligible dividend, which needs GRIP | — | — |
| Both pools, in full | — | — |
Size a dividend you were paying anyway — don’t invent one. Every dollar you distribute is taxable in the shareholder’s hands, and the personal tax on it is almost always larger than the 38⅓¢ it frees up. Recovering refundable tax is a good reason to round a planned distribution up to the clearing amount. It is rarely a good reason to pay a dividend you did not otherwise need.
The pools don’t expire — an unrecovered balance carries forward indefinitely, so there is no deadline pressure. Run the personal side in the salary vs dividend calculator before you decide.
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The ordering rule that catches people. A non-eligible dividend draws from NERDTOH first, and only reaches into ERDTOH once NERDTOH is empty — so paying ordinary dividends can quietly burn an ERDTOH balance you were saving. An eligible dividend can only ever touch ERDTOH; it can never reach NERDTOH.
That asymmetry is deliberate: it stops investment income from being converted into low-taxed eligible dividends. And because eligible dividends need a GRIP balance, which SBD-rate income does not create, ERDTOH is frequently stranded.
6 The capital dividend account
When your company realizes a capital gain, half of it is taxable and half is not. The non-taxable half accumulates in a notional account and can be paid out to shareholders completely tax-free. It is one of the few genuinely free things in the Act — and it is regularly missed.
Capital dividend account
running balance| Opening balance | $ |
| + Non-taxable half of capital gainsFrom step 3 | $7,500 |
| + Capital dividends receivedFrom other corporations | $ |
| + Life insurance proceeds on deathNet of the policy’s ACB | $ |
| − Capital dividends already paid or payable | $ |
| CDA available | $7,500 |
Where to go next
Common questions
Why is my taxable income higher than my accounting profit?
Usually three things: accounting amortization is added back and replaced by CCA, half of your meals and entertainment is denied, and any reserves or accruals that are not legally certain are reversed. If CCA is lower than book amortization in a year — common once assets are well into their declining-balance life — taxable income lands above book profit even though nothing changed in the business.
Which corporate taxes are refundable and which are permanent?
Tax on active business income — 11% within the small business limit, 27% above it — is permanent. Tax on investment income is 50.67%, but 30⅔% of the investment income is refundable, leaving a permanent cost of about 20% on interest and about 10% on a whole capital gain. Part IV tax on portfolio dividends, at 38⅓%, is 100% refundable. Refundable does not mean automatic: it is released only when the corporation pays a taxable dividend, at 38⅓¢ per dollar distributed.
What is the small business deduction grind and does it apply to me?
The $500,000 business limit shrinks two ways. The taxable capital grind reduces it as the associated group's taxable capital employed in Canada rises from $10 million to $50 million. The passive income grind reduces it by $5 for every $1 of adjusted aggregate investment income above $50,000, wiping it out at $150,000. You lose the greater of the two, not both. Most owner-managed companies are nowhere near the capital threshold, so the passive income grind is the one that bites — which is why a growing corporate investment portfolio can quietly raise the tax rate on your operating profit.
Why is investment income taxed at over 50% inside my corporation?
By design. The system aims for integration — you should end up in roughly the same place whether you earn investment income personally or through a company. Federal tax on investment income in a CCPC is 38.67% (28% plus a 10.67% additional refundable tax, with no general rate reduction available), and BC adds 12%, for 50.67%. But 30.67% of the income is refundable, so the permanent cost is only about 20% on interest — the rest comes back when you pay a dividend.
What is the difference between NERDTOH and ERDTOH?
NERDTOH holds the refundable portion of Part I tax on your investment income plus Part IV tax on non-eligible dividends received. ERDTOH holds only Part IV tax on eligible dividends received from non-connected corporations. An eligible dividend you pay can only draw from ERDTOH. A non-eligible dividend draws from NERDTOH first and only reaches ERDTOH once NERDTOH is empty. The split exists to prevent investment income from being paid out as low-taxed eligible dividends.
How do I actually get money out of the capital dividend account?
You file Form T2054 with a certified directors' resolution, on or before the earlier of the day the dividend becomes payable and the day any part of it is paid. The dividend is then received completely tax-free by the shareholder. The balance is a running total measured at that moment, not at year end, so a later capital loss can retroactively make an earlier election excessive — which triggers Part III tax at 60% of the excess unless you elect out under s.184(3).
Does this calculator work for a corporation outside BC?
Not accurately. The federal side is national, but the provincial rates here are BC's 2% and 12%. If your corporation has a permanent establishment in another province, taxable income is allocated between provinces on Schedule 5 using gross revenue and wages, and the combined rate changes. The reconciliation in steps 1 to 4 is still correct anywhere in Canada.
Bring your year-end and we’ll walk the reconciliation together.
Most of the value in corporate tax is not in the return — it is in the decisions made before the year ends. Timing a bonus, choosing the CCA claim, deciding which pool to draw on. A 30-minute chat is usually enough to see whether anything is being left on the table.
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