Tax Treatment of Passive Investment Income

New rules for the tax treatment of small business passive income are simpler than previously proposed and will mitigate negative impacts on savings and investment for most small business owners. They will, however, still increase taxes
for a small percentage of Canadian Controlled Private Corporations with passive investment income over $50,000.

The government will maintain its commitment to:

  • Protect passive investments already made by private corporations,
    including income earned from those investments
  • Establish a $50,000 threshold on passive investment income per year
  • Maintain incentives for venture capital and angel investors

The small business deduction limit will be reduced by $5 for every dollar of passive investment income in excess of the $50,000 threshold. Once passive investment income reaches $150,000, a small company will be subject to the general corporate tax rate. This is a much simpler approach to limiting the tax benefits available to smaller companies than the government proposed last
July and does not involve changing refundable taxes or dividend tax rates.

The budget also proposes to end the tax advantage that larger CCPCs have by paying out lower taxed dividends from active income taxed at the general corporate tax rate and then claiming refunds of taxes paid on their investment
income intended to be taxed at the higher tax rate.