Passive Income Business Limit Reduction

There is a new limitation on the 500 000 small business deduction based on a company s previous year s passive income.

Passive income business limit reduction. The 30 000 additional passive income has reduced the small business deduction by 150 000 thereby increasing the tax obligation by 21 000 26 5 150 000 12 5 150 000. Better understand the reduction of the business limit on october 16 2017 department of finance announced to reduce the tax rate for small ccpcs that earned a qualifying active business income from 10 5 per cent to 10 per cent effective january 1 2018 and to 9 per cent effective january 1 2019. Enter the reduction on new line 422 and the resulting reduced business limit on new line 426. A corporation can have up to 50 000 of investment income in the prior year with no impact to the small business deduction.

The reduction in the ccpc s business limit is then the greater of its taxable capital business limit reduction and its passive income business limit reduction for the year. Please see the table below for how passive income reduces the small business deduction and correspondingly increases the tax penalty. Depending on the amount of passive income eg. Under the proposals the small business limit will be reduced by 5 for every 1 of investment income above a 50 000 threshold.

Bl 500 000 x 5 aaii 50 000 where. The passive income reduction reduces a corporation s business limit for a taxation year as otherwise determined by five dollars for every dollar by which the corporation s adjusted aggregate investment income as newly defined in subsection 125 7 and that of its associated corporations for taxation years ending in the preceding. Passive income earned small business limit reduction small business limit available. Investment income such as interest dividends and capital gains a private corporation may be subject to a reduction of their sbd.

5 x 90 000 50 000 200 000. Canadian controlled private corporation s passive investment income. Under this formula the sbd will be eliminated when investment income reaches 150 000 in a given taxation year. Bl is the ccpc s business limit otherwise determined for the particular year i e its business limit as described above.

The passive income reduction reduces a corporation s business limit for a taxation year as otherwise determined by five dollars for every dollar by which the corporation s adjusted aggregate investment income as newly defined in subsection 125 7 and that of its associated corporations for taxation years ending in the preceding. Income in excess of the small business limit would be taxed at the general corporate rate of 26 5.