Passive Income Calculation

The most recent budget refined the method that will be used to calculate the additional tax to be paid if you have passive income in an active business. The issue the Federal government has with this passive income in an active business, is that there is more money available to invest, if you are only paying income tax at the small business rate. The threshold is $50,000 of passive income a year. After that, the corporation starts losing the small business deduction on a pro-rated basis. To be clear, the corporation is paying the higher rate tax on its passive income already, but if this income is more than $50,000 they will lose the deduction on their active income.

The assumption is that you need about $1,000,000 of passive investments inside your active business to be generating $50,000 of passive income. Most business owners do not have to worry about this problem as they are not keeping that much money invested inside their active corporations.

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