Passive Income Tax Rate In Canada

The small business clawback in 2018 canadian controlled private corporations ccpcs pay corporate income tax on small business income at 10 percent federally.

Passive income tax rate in canada. Businesses with less than 50 000 in annual passive income can claim the full 500 000 at the 9 small business rate. 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. At 150 000 of passive income none of the active business income will qualify for the small business tax rate. This has a dramatic effect on the amount of tax on that 500 000.

So if you have a portfolio within your corporation that generates more than 50k year in passive income more of your corporate active income will face the higher general tax rate. This results in a net corporate tax of 8. These types of passive investment income earned inside a ccpc are part i tax and will be taxed at a federal rate of 38 67. How do the new passive income rules affect small businesses.

The small business deduction limit will get reduced by 5 for every 1 in excess passive income. In 2019 the company will earn 500 000 of active business income. After 500k active earnings are taxed at the general tax rate of 15. Of the 38 67 the ccpc will receive a refundable dividend tax on hand credit rdtoh of 30 67 when a taxable non eligible dividend is paid out to the shareholders.

The amount eligible for the small business rate shrinks by 5 for every 1 over 50 000 that a business makes in passive income until it eventually reaches zero. 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. This rate is to be reduced to 9 percent in 2019. As illustrated in the table below the passive income rule change will result in the company paying 40 000 more tax than it would have before the cra passive income tax changes.

In 2018 the company earned 100 000 of passive investment income.