Take an Active Role in Managing Your Passive Investment Income
Canadian small business owners often invest excess corporate funds into investment vehicles within their corporation as part of their financial planning strategy. This can be advantageous because retaining these funds in their corporation defers the tax that would ultimately have been paid at the personal level, leaving more after-tax dollars to invest than if the funds were withdrawn by a shareholder and then invested at the personal level. The income earned through investments made within a corporation, such as dividends, interest, rent, and 50% of capital gains is considered passive investment income, also known as adjusted aggregate investment income (AAII) for tax purposes.
Canadian small business owners also benefit from a lower corporate income tax rate on active business income (ABI) earned within a corporation. The active business income of a corporation may be eligible for a lower corporate income tax rate through the use of the small business deduction (SBD). Canadian-controlled private corporations (CCPCs) are taxed at the small business rate (12.5% in Ontario) for the first $500,000 of active business income earned. CCPCs are taxed at the general rate (26.5% in Ontario) for ABI earned over $500,000.