PASSIVE INVESTMENT INCOME
Budget 2018 proposes two measures, applicable to taxation years
that begin after 2018, to limit tax deferral advantages on passive
investment income earned inside Canadian Controlled Private
A preferential tax rate applies to CCPCs having active business
income up to $500,000 (the “business limit”). The business limit is
shared amongst associated corporations. The business limit is
reduced on a straight-line basis for a CCPC and its associated
corporations having between $10 million and $15 million of total
taxable capital employed in Canada.
Adjusted Aggregate Investment Income
For the purpose of determining the reduction of the business limit
of a CCPC, investment income will be measured by a new concept
of adjusted aggregate investment income which will be based on
aggregate investment income (a concept that is currently used in
computing the amount of refundable taxes in respect of a CCPC’s
investment income) with certain adjustments. The adjustments will
include the following:
• Taxable capital gains (and losses) will be excluded to the extent
they arise from the disposition of:
a property that is used principally in an active business
carried on primarily in Canada by the CCPC or by a
related CCPC; or
a share of another CCPC that is connected with the CCPC,
where, in general terms, all or substantially all of the fair
market value of the assets of the other CCPC is attributable
directly or indirectly to assets that are used principally in
an active business carried on primarily in Canada, and
certain other conditions are met.
• Net capital losses carried over from other taxation years will
• Dividends from non-connected corporations will be added; and
• Income from savings in a life insurance policy that is not an
exempt policy will be added, to the extent it is not otherwise
included in aggregate investment income.
Budget 2018 proposes to reduce the business limit for CCPCs (and
their associated corporations) that have significant income from
This measure will apply to taxation years that begin after 2018.
Certain rules will apply to prevent transactions designed to avoid
the measure, such as the creation of a short taxation year in order
to defer its application and the transfer of assets by a corporation
to a related corporation that is not associated with it.
The current tax regime relating to refundable taxes on investment
income of private corporations seeks to tax income from passive
investments at approximately the top personal income tax rate while
that income is retained in the corporation. Some or all of these taxes
are added to the corporation’s refundable dividend tax on hand
(RDTOH) account and are refundable at a rate of $38.33 for every
$100 of taxable dividends paid to shareholders.
For income tax purposes, dividends paid by corporations are either
eligible or non-eligible. Non-eligible dividends are generally paid
from a corporation’s passive income and income taxed at the small
business tax rate, while eligible dividends are generally paid from
a corporation’s income that has been subject to the general corporate income tax rate.
A corporation receives a refund of taxes paid on investment income
(RDTOH) regardless of whether the dividends paid are eligible or
non-eligible. When refunds are received as a result of an eligible
dividend, this can provide a tax deferral advantage on passive
The business limit reduction under this measure will include investment income of any other associated corporations. It will also operate alongside the business limit reduction that applies in respect of
taxable capital in excess of $10 million.
Under this measure, the business limit will be reduced by $5 for
every $1 of investment income in excess of $50,000, such that the
business limit will be eliminated at $150,000 of investment income.
As outlined in the table below, a CCPC with $100,000 of investment income would have its business limit reduced to $250,000.
Provided the reduced business limit remains above the active business income of the CCPC, all of that income would continue to be
taxed at the small business tax rate. A CCPC with $75,000 of business income would have to earn more than $135,000 in passive
income before its business limit is reduced below its business
income. This feature of the proposed rules recognizes CCPCs with
lower amounts of business income generate less retained earnings
that can later be used for reinvestment in the business and may have
more difficulty accessing capital. CCPCs with business income
above the reduced business limit will be taxed on income above the
business limit at the general corporate tax rate.
Active business income qualifying for the small business tax
rate under new business limit:
1. Business Limit Reduction
2. Refundability of Taxes on Investment Income