Reduce passive income, reduce taxes We help. You grow. What is - - PowerPoint PPT Presentation

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)

can apply the small business deduction (SBD) to some active business income.

• The SBD is entitled to the lower, small business

tax rate.

• Earning corporate passive income reduces amount
• f active income eligible for SBD.

Passive income: can include certain types

• f capital gains, rent,

royalties, dividends, and interest

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 $150K Your potential $500K active income eligibility is reduced to zero Between $50k and $150K

Every $1 of passive income (over $50K) lowers active income eligibility by $5

Under $50K

No impact to active income eligibility

Under $50K Between $50k and $150K Over $150K

Tax rate on non-eligible active income = 27%

Understanding the impacts

A reduction in active income eligibility for SBD = more taxes

Total Passive income = $50K

Passive income Active income Tax on active income $50K Eligible ($500K) $55K

Tax rate on eligible active income = 11%

Total tax = $55K

Eligible ($500K) $55K $50K Passive income Active income Tax on active income

Total tax = $55K

Tax rate on eligible active income = 11% Tax rate on non-eligible active income = 27%

A reduction in active income eligibility for SBD = more taxes

Understanding the impacts

Total Passive income = $100K

Passive income Active income Tax on active income $50K Eligible ($250K)

$27.5K

Tax rate on eligible active income = 11%

$50K Every $1 of passive income (over $50K) lowers active income eligibility by $5 Not Eligible ($250K) $67.5K

Tax rate on non-eligible active income = 27%

Total tax = $95K

Eligible ($250K)

$27.5K

$50K Not Eligible ($250K) $50K $67.5K

Total tax = $95K

Understanding the impacts

A reduction in active income eligibility for SBD = more taxes

Tax rate on eligible active income = 11%

Total Passive income = $150K

Passive income Active income Tax on active income $50K $100K Your potential $500K active income eligibility is reduced to zero Not Eligible ($500K) $135K

Tax rate on non-eligible active income = 27%

Total tax = $135K

Not Eligible ($500K) Not Eligible ($500K) $50K $135K $100K $50K Passive income $100K

Options to reduce passive income

• Purchase investments with an eye to defer
• r stagger capital gains.
• Fund registered retirement vehicles (e.g.

IPP, RCA, IRP, etc).

• Purchase corporately owned, exempt

permanent life insurance policies (e.g. CRS, CAT, CIS). Growth within an exempt life insurance policy will not affect a CCPC’s 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

• f the Canada Revenue Agency (CRA) in effect.