For business owners

Investing inside your company? Watch the $50,000 line.

A corporation that earns investment income can lose its low small-business tax rate. Here is the rule and why it matters.

2 min read • No tax knowledge needed

How it works, in three steps

1Investments in a company earn passive income. That includes interest, rent, dividends and the taxable part of capital gains.
2It is taxed at a higher rate than business income. Part of that tax can be refunded when the company pays dividends to you.
3Above $50,000 a year, the small-business rate starts to shrink. For each dollar over $50,000, the limit for the small-business rate falls by $5, and it is gone at $150,000.

The small-business limit is $500,000 federally. Provinces can apply their own rules; Ontario, for example, does not apply the federal reduction.

A simple example

Your company earns $100,000 of passive income. That is $50,000 over the line, so the $500,000 limit is cut by 5 x $50,000 = $250,000.

Only $250,000 of business profit then gets the small-business rate. The rest is taxed at the higher general rate.

Does this matter to me?

It matters most if your company

Holds large investments or rental property
Has built up retained profit that is invested
Is associated with other companies, since their passive income is combined

It matters less if your company

Pays out most of its profit each year
Holds only a modest cash balance

The honest catches

The test uses a specific measure. The CRA looks at "adjusted aggregate investment income", which differs a little from the passive income on your statements.
Planning takes time. Choices about where to invest, inside or outside the company, are worth discussing with an accountant before the year ends.
Rules vary by province. This page is a federal overview.

This is education, not tax, legal or investment advice. Talk to a licensed Canadian chartered professional accountant or certified financial planner before you act.

See the personal tax on dividends

If you move money out of the company, this shows the personal tax on the dividends.

Open the Dividend Tax Calculator

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