The intelligent substations should be developed to perform multifunction operations, including power flow control, voltage regulation, and cost-effective power quality improvement. In this paper, an intelligent substation by a distribution transformer integrated with a capacitive-coupling winding tap injection static synchronous compensator (CWTI-DSTATCOM) is proposed for balance and unbalance operations. Compared with the state-of-the-art approaches, CWTI-DSTATCOM can operate at a low dc voltage with a small active inverter rating, which also can provide distributed voltage, reactive, and unbalanced current compensation. The power rating reduction mechanism is mathematically revealed via balance and unbalance compensation analysis, which is further used to determine the optimal inverter power rating of unbalance operation via an optimal LC filter design method. Furthermore, a comprehensive compensation control strategy is developed to coordinate the transformer taps and the active inverter under balanced and unbalanced operations. Simulation and real-time digital simulator (RTDS) hardware-in-the-loop (HIL) experiments are performed to prove the validity and effectiveness of the proposed topology over inverter rating reduction and power quality enhancement.