Each type of investment income is treated slightly differently for tax purposes, so each type of income has to be reported separately in different parts of the tax return to ensure the correct tax treatment is applied. Most investment income is considered to be inactive or passive income and subject to a higher tax rate, up to 45.67%, rather than active business income (taxed at 13.5% for BC Canadian Controlled Private Corporations on the first $500,000). This difference in tax rates is due to political-economic motives. Successive Canadian governments prefer investment income to circulate in the economy generating economic growth rather than sitting inside a corporation. One tool to encourage this behaviour is to apply high corporation taxes on certain types of income held inside a corporation and refund a portion of those taxes when that income is distributed by the corporation. Over the next four weeks, we are going to look at each of the following most common types of investment income earned in a corporation:

1. Interest income
2. Dividend income
3. Capital gains
4. Foreign investment income.

The tax treatment of investment income can be complicated but understanding some of the basic concepts will allow the reader to plan more effectively the tax implications of income streams.