Reduce passive income, reduce taxes We help. You grow.
What is passive income and why does it matter? Federal government changed rules, effective for tax years that begin after 2018. • Canadian controlled private corporations (CPCC) Passive income: can can apply the small business deduction (SBD) to some active business income. include certain types • The SBD is entitled to the lower, small business of capital gains, rent, tax rate. royalties, dividends, • Earning corporate passive income reduces amount and interest of active income eligible for SBD.
Passive income impacts your business Up to $500K of your active business income could be eligible for the small business tax rate. But, if your passive income amount is… Over Over Your potential $500K active income $ 150K $ 150K eligibility is reduced to zero Between Between $50k $50k Every $1 of passive income (over $50K) and and lowers active income eligibility by $5 $150K $150K Under Under No impact to active income eligibility $50K $50K
Understanding the impacts A reduction in active income eligibility for SBD = more taxes Tax rate on eligible active Tax rate on eligible active income = 11% income = 11% Tax rate on non-eligible Tax rate on non-eligible active income = 27% active income = 27% Eligible Eligible ($500K) ($500K) Total Total tax Total tax Passive = $55K = $55K $55K $55K $50K $50K income = $50K Passive income Passive income Active income Active income Tax on active Tax on active income income
Understanding the impacts A reduction in active income eligibility for SBD = more taxes Tax rate on eligible active income = 11% Every $1 of Tax rate on non-eligible passive income active income = 27% Not Not (over $50K) Eligible Eligible lowers active ($250K) ($250K) income eligibility by $5 Eligible Eligible ($250K) ($250K) Total Total tax Total tax $67.5K $67.5K $50K $50K Passive = $95K = $95K $50K $50K income $ 27.5K $ 27.5K = $100K Passive income Active income Tax on active income
Understanding the impacts A reduction in active income eligibility for SBD = more taxes Tax rate on eligible active income = 11% Your potential Tax rate on non-eligible $500K active active income = 27% income eligibility is reduced to zero Not Not Not Eligible Eligible Eligible ($500K) ($500K) ($500K) $100K $100K $100K $135K $135K Total Total tax Passive = $135K $50K $50K $50K income = $150K Passive income Passive income Active income Tax on active income
Options to reduce passive income • Purchase investments with an eye to defer or stagger capital gains. Growth within an • Fund registered retirement vehicles (e.g. exempt life IPP, RCA, IRP, etc). insurance policy will • Purchase corporately owned, exempt not affect a CCPC’s permanent life insurance policies (e.g. CRS, CAT, CIS). passive investment income earnings
Disclaimer This article is intended to provide general information only. Sun Life Assurance Company of Canada (Sun Life) does not provide legal, accounting or taxation advice to advisors or clients. Before a client acts on any of the information contained in this article, or before you recommend any course of action, make sure that the client seeks advice from a qualified professional, including a thorough examination of his or her specific legal, accounting and tax situation. Any examples, illustrations and information based on Sun Life’s understanding and interpretation of the Income Tax Act (Canada) and regulations have been included only to help clarify the information presented in this article, and should not be relied on by you or the client in any transaction. Any tax information provided in this document is based on the provisions of the Income Tax Act (Canada) and the regulations as of April 2020. In addition, these are subject to Sun Life’s current understanding and interpretation of the rules and the administrative practices of the Canada Revenue Agency (CRA) in effect.
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