Introduction

A physician who has been incorporated for several years will typically find that retained earnings have accumulated inside the professional corporation — after-tax income that has not been distributed personally and that now needs to be invested. How those earnings are invested, and what income they generate, has direct implications for the corporation's corporate tax rate.

This article addresses the investment decision within a physician's professional corporation — what types of investments are available, how the passive income rules affect the tax position, and what considerations should guide the approach.

The Tax Rate on Investment Income Inside a Corporation

Investment income earned inside a private corporation — interest, dividends from non-connected Canadian corporations, and capital gains — is taxed at a high combined corporate rate in Ontario (approximately 50.17% in 2026). This rate is intentionally high, because the federal tax system uses a refundable mechanism (Refundable Dividend Tax on Hand, or RDTOH) to ensure that passive income is not permanently taxed more heavily inside a corporation than it would be personally.

When the corporation pays a dividend to the shareholder, a portion of the tax paid on passive income is refunded to the corporation — the RDTOH mechanism. The end result is that passive income inside a corporation is intended to be taxed at roughly the same total rate (corporate plus personal) as if it had been earned personally.

The deferral advantage of the corporation is reduced for passive income compared to active business income — but passive income can still benefit from deferral if the corporation does not immediately distribute it.

The Passive Income Threshold: The More Immediate Problem

As discussed in Article 10, a CCPC that earns more than $50,000 in adjusted aggregate investment income (AAII) in a given year faces a reduction in its small business deduction for the following year. At $150,000 of AAII, the SBD is eliminated entirely.

For a physician whose corporation has $2–3 million in retained earnings invested in a balanced portfolio, annual investment income of $50,000–$150,000 is entirely plausible. At that level, the corporation may be paying the general corporate rate (approximately 26.5%) rather than the small business rate (approximately 12.2%) on active medical billings — a difference of over 14 percentage points on up to $500,000 of income.

This interaction between passive income and the SBD is the most pressing tax consideration for physicians with significant accumulated corporate wealth.

Investment Options and Their Tax Treatment Inside a Corporation

Different types of investments generate different types of passive income, and their tax treatment inside a corporation differs accordingly.

Interest income (GICs, bonds, savings accounts): Fully taxable as investment income at the high passive rate. Generates RDTOH that is refunded when eligible dividends are paid. Counts entirely toward AAII for SBD purposes.

Canadian dividends (from taxable Canadian corporations): Taxed under a different regime. Eligible dividends from connected corporations are excluded from AAII. Eligible dividends from non-connected Canadian public companies are not excluded but are taxed under the dividend refund mechanism differently. Non-eligible dividends follow a different refund pathway. The interaction is specific and should be reviewed with a CPA.

Capital gains (from equities, mutual funds, ETFs): Only the taxable portion of a capital gain (the included portion) counts toward AAII. At a 50% inclusion rate, $100,000 of capital gains contributes $50,000 to AAII. Growth-oriented investments that generate capital gains rather than regular income can be more efficient from an AAII perspective than interest-bearing investments.

Exempt life insurance (permanent life policies): Investment growth inside a corporate-owned exempt life insurance policy does not generate passive income reportable for AAII purposes. This is one reason corporate-owned permanent insurance is frequently used as an investment vehicle for accumulated retained earnings.

The Timing of Distributions

For physicians approaching the SBD passive income threshold, one option is to distribute more retained earnings as dividends in years where the AAII is approaching $50,000 — accepting personal tax now in exchange for reducing the corporate investment base and its ongoing passive income generation.

This is a genuine trade-off that involves modelling the after-tax result of distributing now versus deferring. The right answer depends on the physician's personal marginal rate, the expected future return on the invested assets, and the expected personal tax rate in retirement when distributions would eventually occur anyway.

When to Speak With a CPA

Investment decisions inside a professional corporation — particularly for physicians with substantial accumulated retained earnings — benefit from integration with the annual tax planning conversation rather than being made independently of it. A CPA can model the AAII impact of different investment allocations and identify where the passive income threshold risk lies.

Rotaru CPA works with physicians and incorporated professionals on investment strategy within their professional corporations. Book a consultation to review your corporate investment position.