Small Business Deduction Passive Income Rules

The small business deduction and the new passive investment rules at first the proposed changes released by the minister in july of 2017 would have taxed passive income essentially at a rate equal to the top marginal rate for individuals.

Small business deduction passive income rules. These changes will apply where a corporation earns passive investment income and also earns income from active business that is taxed at the small business rate or small business income. But for every dollar of passive income over that amount you lose 5 of the deduction. A corporation can have up to 50 000 of investment income in the prior year with no impact to the small business deduction. Bl 500 000 x 5 aaii 50 000 where.

Notice to the reader. These new cra passive income changes will first apply to fiscal years that start in 2019 and will reduce the maximum small business deduction available to a ccpc or associated group of ccpcs by 5 for every 1 of passive investment income earned in the previous fiscal year in excess of 50 000. Small business tax rate of 10. The 2018 federal budget proposed new rules regarding the mechanism to access a dividend refund where passive income is earned in a corporation beyond the scope of this article and the clawback of the small business deduction sbd.

There is a new limitation on the 500 000 small business deduction based on a company s previous year s passive income. The table below is a summary of the tax penalty by the amount of passive income. Had the full corporate tax rate of 26 5 been applied the tax obligation would have been 265 000 26 5 of 1m. The small business deduction limit will get reduced by 5 for every 1 in excess passive income.

To preserve the small business deduction limit under the. General corporate tax rate of 15. Under the new rules passive investment income earned by a ccpc can have a negative impact on the corporation s ability to claim the sbd. The small business deduction saved this corporation 65 000 in taxes.

Passive income reduces the small business deduction. The recent federal budget proposed changes the proposals that will restrict access to the small business deduction sbd for many corporations. Under the new rules the active income a business is allowed to claim at the small business amount is tied to the business passive income. For every 1 of passive income earned over the new 50 000 threshold by an associated group of companies the sbd limit will be reduced by 5.

I can illustrate this better with a table. Businesses with less than 50 000 in annual passive income can claim the full 500 000 at the 9 small business rate. A ccpc s passive income business limit reduction for a particular taxation year will be the amount determined by the formula.