CCPC Passive Investment Income Changes.
Rules for corporations earning passive income are changing. For those unfamiliar with the difference between ‘passive’ and ‘active’ income, here’s a brief explanation: income is considered active if it is earned from a business, for example, a manufacturer of widgets. The manufacturer is actively creating and selling a good; therefore, this income would be taxed at small business rates (10% in Manitoba) because the income is considered ‘active’. Passive income, on the other hand, includes items like rental, dividend, and interest income. These forms of income are generated simply by holding an investment or asset, hence the ‘passive’ denomination. Passive income tends to be taxed at much higher rates (approximately 50% upfront).
New rules are in force that will apply to any year-ends beginning after 2018. Under the new rules, the business income of the CCPC that qualifies for the SBD in a taxation year will be reduced, on a 5:1 basis, when its passive investment income (and that of its “associated” CCPCs) for the preceding taxation year exceeds $50,000. For example, if the CCPC’s passive investment income in a taxation year is $70,000, its maximum business income eligible for the SBD for the next taxation year will be reduced to $400,000 (that is, the maximum $500,000 small business income limit minus 5 x ($70,000 minus $50,000)). In short, the business income of the CCPC that qualifies for the SBD will be reduced in a 5:1 ratio. The business income that does not qualify will then be subject to the higher general corporate tax rate, which, as noted, is about 27-30% depending on the province.
If you would like to know how these changes might affect you and your business, don’t hesitate to set up a consultation at your convenience.