Business owners be alert about Canada’s new passive income rules!

The revised rules for CCPCs passive investment income – adjusted aggregate investment income - affects your corporate tax. Do you know how your retained earnings will be affected? Your corporate earnings not directly related to business sources, could be significant. Dividends, capital gains, royalties, rent can all add to your passive investment income. If your corporation has a large portfolio you may earn significant passive investment income from assets such as fixed-income investments and dividendpaying stocks.

Is your business a Canadian Controlled Private Corporation (CCPC)?

  • Do you reduce your corporate tax on your active business income, using the Small Business Deduction (SBD)?
  • How much of your active business income is eligible for the small business tax rate?

As a CCPC you can use the SBD and claim the federal small business tax rate on up to $500,000 of active business income for a sizable tax reduction. Take note, you may be affected by taxable capital your associated corporations employ in Canada.

  • New rules for passive investment income will affect eligibility of your active business income for the small business tax rate if your passive investment income exceeds $50,000. Above $150,000, your active business income is no longer eligible for the small business tax rate!

Do you want to pay more tax on your $500,000 active business income plus pay tax on the passive investment income as well? This could result in paying taxes possibly higher than the passive investment income earned! This cannot be avoided by using a holding Company.

What can you as a business owner do on the earnings in your retained funds? You have options for positive use of these savings:

  • An exempt life insurance policy will not affect a CCPCs passive investment income earnings under the new passive income rules.
  • Life insurance is also key in estate and succession planning to ensure you have the protection you need while you have growth in the policy to help benefit your incorporated business.

Do you know:

  • How tax-deferred investments can be utilized for tax-preferred earnings of passive investment income?
  • Enable you to access your Lifetime Capital Gains exemption (LCGE) on the disposition of your qualified small business corporation shares? Corporately owned life insurance can be the answer for your business – now and in the future.

https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federalgovernment-budgets/budget-2018-equality-growth-strong-middle-class/passive-investmentincome/small-business-deduction-rules.html

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-25400-capital-gains-deduction/what-deduction-limit.html?=undefined&

Contact me on my email: kusum.sen@dfsin.ca

*Mutual funds distributed through Desjardins Financial Security Investments Inc.

Life and health insurance products are provided by Kusum Sen through Desjardins Financial Security Independent Network. Life and health insurance products and services are not available through Desjardins Financial Security Investments Inc. (DFS Investments) nor are the insurance plans or services available and/or offered, supervised or reviewed by DFS Investments. DFS Investments is the mutual fund dealer through which mutual fund products and services are provided.

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