Federal budget 2018: Corporate tax measures: Passive investment income

Following the tabling of the 2018 federal budget on Tuesday, February 27, 2018, one tax measure for businesses stands out from the others: the new rules on passive investment income.

Passive income is currently taxed at a higher rate than active income.* For the active income of a private company under Canadian control, the first $500,000 is generally taxed at a lower rate than the active income above this threshold. Active income (which comes from actively operating a business) above the $500,000 threshold is taxed at a higher rate than income below this threshold, but remains less taxed than investment income.

The proposed changes featured in the budget tabled by the Department of Finance Canada will reduce the favourable $500,000 threshold for active income. Basically, if a company earns more than $50,000 in investment income, this will impact the tax rate for active income.

The business limit (generally $500,000**) will be reduced by five times the investment income in excess of $50,000. For example, if a company earns $100,000 in investment income, the business limit will be reduced by $250,000, and the reduced limit will be $250,000. This means that the company in question will benefit from the reduced tax rate only on its first $250,000 of profit rather than on the current $500,000.

Given that this article is a brief summary that does not take into account all the facts related to a given situation, it cannot be construed as tax advice. If this matter affects you, please consult your tax advisor at Impôts ICI! to find out exactly what impact it will have.

Nicolas Godbout, M. Fisc, FPA

*Without considering the refundable dividend tax on hand (RDTOH) that can be recovered. Passive income does not come from operating an active business.
**The business limit can be reduced if the taxable capital exceeds 10 million dollars, for example.

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