A simple solution to the problem of high corporate tax rates on investment income would be to apply a different, lower corporate tax rate directly to this type of income. Instead, the Canadian tax system uses refundable taxes to lower the rate of taxation on investment income of CCPCs. Why?

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Applying a lower corporate tax rate directly to investment income would provide a significant deferral of taxes on this type of income, which could create a disincentive for corporations to distribute profits to shareholders. Refundable taxes on investment income incentivize corporations to retain funds in the corporation and could also encourage early filing of corporate tax returns. Additionally, lower rates could create a situation where the payment of dividends to shareholders would result in double taxation, so refundable taxes provide a more efficient solution to address the issue.

A Simple Solution to the Problem of High Corporate Tax