Do you have passive income in your Canadian corporation? If so, you need to be aware that it is taxed differently than active business income. Income from investments and property can impact your small business deduction. This, in turn, impacts the amount of tax you pay in your corporation.
In this post, you’ll learn what passive income is and the impact it has on the small business deduction.
What is passive income?
Passive income is any type of income that is not earned from active work. This includes, but is not limited to, income from property, such as rental income and royalties, as well as interest and dividend income. If you have this type of income in your Canadian corporation, it is taxed at a higher rate than your active business income.
Income that is not earned isn’t eligible for certain tax incentives. This is why you’ll pay more tax on it.
What is the small business deduction?
The small business deduction is a tax measure that allows Canadian-controlled private corporations (CCPCs) to pay a lower corporate tax rate on the first $500,000 of active business income. This deduction was put in place to help support small businesses and encourage entrepreneurship.
Passive income in your corporation impacts the small business deduction.
What are the tax consequences of passive income?
If your corporation has income from investments and property rentals, you could lose the small business deduction. This deduction is prorated when your corporation earns more than $50,000 in this type of income in a year. Once the passive income amount hits $150,000, the small business deduction is completely eroded. This results in higher taxes for your business.
On average, the small business deduction cuts tax rates by more than 50%.
What can you do?
To avoid the impacts of investment and rental income on your corporate taxes, the most obvious thing to do is reduce this kind of income. Reinvest money into your business instead. You can do this by paying down debt, selling current investments, or purchasing equipment you need in your business.
If you like the idea of having passive income in your corporation, then make sure you are claiming eligible expenses against it. This includes expenses such as management, accounting, and legal fees related to the passive income.
If you’re not sure if your corporation has passive income or how it impacts the taxes you pay, get in touch to learn more. We help business owners minimize their taxes payable by taking advantage of tax incentives like the small business deduction and more!
