Integration of non-active business income occurs through the use of the RDTOH account. 26 2/3% of non-active business income is included in the RDTOH account. This amount is refundable to the corporation at the rate of $1 for every $3 it pays out in taxable dividends (subsection 129(1)). The refund in any year is the lesser of:
1. one-third of all taxable dividends paid out by the corporation in the year, and
2. the amount in the RDTOH account.
Under subsection 129(3), a CCPC's RDTOH account consists of:
1. The least of:
i. 26 2/3% of CCPC's aggregate investment income, restricted to Canadian tax paid on the investment income;
ii. 26 2/3% of taxable income less the least of
A. the corporation's active business income;
B. the corporation's taxable income; and
C. the business limit; and
iii. the corporatin's tax for the year payable, excluding the surtax; plus
2. Any Part IV tax paid; plus
3. the corporation's RDTOH at the end of the preceding year less any dividend refunds received by it under subsection 129(1) for its preceding year.
Aggregate investment income in subsection 129(4)includes:
1. the corporation's net taxable gains less
any deduction of carryover losses from prior years; plus
2. the corporation's income for the year from a source that is a property, net of all related outlays and expenses deducted in the year which were made or incurred for the purpose of earning income from property, but excluding dividends that are deductible in computing taxable income.
Income for the year from a source that is a property includes income from a specified investment business but does not include income from any property that is incident to or pertains to an active business carried on by it (subsection 129(4)) or that is used or held principally for the purpose of gaining or producing income from an active business carried on by it.
Recall that a specified investment business is defined in subsection 125(7) to be a business the principal purpose of which is to derive income from property.
Aggregate investment income is initially taxed at the full corporate rate. For the purposes of integration theory this rate is assumed to be 50%. In Alberta the rate is 47.28%.
However we will be using the theoretical 50% to illustrate how the integration model is supposed to work.