Passive income and small business deduction grind

The small business deduction ("SBD") is available if the company is a Canadian Controlled Private Company and earns active business income. However, effective from 2019, the $500,000 federal SBD limit is reduced for Canadian Controlled Private Companies based on the level of passive income in the previous year. The SBD limit is reduced by $5 for each $1 of passive income that exceeds $50,000 and small business deduction is fully eliminated if $150,000 of passive income is earned in a year.

As associated corporations share the SBD limit, passive income is combined for associated corporations and the $50,000 threshold is shared among the associated group. Generally speaking but subject to detailed analysis, two corporations are associated when either;

• One corporation is controlled by another corporation;

• Each corporation are controlled by the same person or group of persons;

• One corporation controlled by a person, and that person is related to a person who controls the other corporation, and there is at least 25% cross ownership by either person;

• One corporation controlled by a person, and that person is related to a group of persona who controls the other corporation, and the one person owns at least 25% of the other corporation

• Each corporation is controlled by a related group of person, and each member of one of the related groups was related to all of the members of the other related group, and there is at least 25% cross ownership

Passive investment income includes the following:

• Dividends from portfolio investments and non-connected corporations

• Interest

• Rent (excluding rent from associated corporation carries an active business)

• Taxable capital gains

In order to mitigate the impact of the new legislation on the passive income changes, the business owner might consider the following:

• Disassociate the company with the investment activity from the company with the active business operations.

• Considering adjust investment assets from marketable securities with large dividends to marketable securities focusing on capital growth.

• Utilize the surplus to pay down debt or invest/expand the active business.

Want to learn more on how this new legislation will impact your business? Contact us today to book an initial consultation.