Impact of Passive Investment Income on Business Limit for Canadian-controlled Private Corporation (CCPC)

Canadian-controlled Private Corporation’s Passive Investment Income: Better understand the reduction of the Business Limit

On October 16, 2017 Department of finance announced to reduce the tax rate for small CCPCs that earned a qualifying active business income from 10.5 per cent to 10 per cent, effective January 1, 2018, and to 9 per cent, effective January 1, 2019.

On February 27, 2018, the Honourable William Francis Morneau, Minister of Finance announced in the 2018 federal budget how the taxable passive investment income exceeding $50,000 will affects CCPCs, and one of the important measures was the reduction of the business limit for CCPC’s and their associated corporations. These measures will apply to taxation years that begin after 2018.

This reduction applies on a straight-line basis for CCPC’s having passive investment income between $50,000 and $150,000. Also, this reduction goes alongside with the reduction of the business limit based on taxable capital exceeding $10 million. However, the business limit will be reduced by the greater of:

• The reduction under this measure; and
• The reduction based on taxable capital exceeding $10 million.

For corporations that are associated, it will be important to review the impact of this measure on the whole group. The passive income earned in one corporation will be used in the calculation of all associated corporation’s business limits.  Moving investments into separate holding companies, which is common practice to purify operating companies, will cause a reduction in the operating company’s small business limit.

For example: If an operating company “OPCO” which earns active business only is associated with an investment corporation “HOLDCO” with more than $150,000 taxable passive investment income will have its business limit eliminated.

This measure will likely affect some CCPCs and their associated corporations. Please contact a member of Crowe BGK’s domestic tax team should you need assistance to confirm how this measure will impact your situation.

About the Author:

Assane Diop, CPA, CGA, M. Fisc., is a Tax Specialist at Crowe BGK

Connect with him: [email protected]