Corporate Tax Rate On Passive Income In Canada

With the exception of inter corporate dividends passive income earned by ccpcs or any corporation in canada is ineligible for deductions and consequently fully taxable at the corporation s combined provincial and federal tax rate.

Corporate tax rate on passive income in canada. As outlined the effective tax rate on passive income is 50 7 while dividend income is taxed at 38 3. The higher rate is 14. Table 1 below walks us through the corporate tax rates for those four types of income. Prior to april 1 2018 it 3.

In other words only 350k of active business income is eligible under the small business tax rate of 10 rather than the general corporate tax rate of 15. At 150 000 of passive income none of the active business income will qualify for the small business tax rate. Passive investment income in your private corporation. In this case the business owner would pay an additional 150k 5 7 500 in corporate tax following the assumptions in the table above.

The new rule changes mean that a ccpc s passive investment income now exposes a business owner to more tax on active business income. This has a dramatic effect on the amount of tax on that 500 000. For many small business owners their private company is a key component in saving for their family and their future retirement. Since 2009 a ccpc using the sbd could claim the small business tax rate on the first 500 000 of its active business income carried on in canada representing a fairly substantial reduction in tax.

In new brunswick the lower rate of corporate income tax is 2 5. The following rates apply for a 12 month taxation year ending on 31 december 2020. This is frequently higher than the marginal tax rate payable by the individual which reduces the desirability. However a portion of the federal tax on passive and dividend income is refundable when a taxable dividend is paid to a corporation s shareholder.

For non resident corporations the rates apply to business income attributable to a permanent establishment pe in. For this ccpc 150 000 of passive investment income results in 135 500 of tax on active business income at the combined corporate tax rate of 27.