Corporate Investing: Managing the $50k Passive Income Threshold

The 2018 Passive Income SBD Grind Rules

Under the federal small business rules, active business income up to $500,000 is taxed at the preferential 9% - 12% combined corporate tax rate (Small Business Deduction - SBD).

However, if your corporation earns more than $50,000 in net passive investment income in a tax year, your $500,000 SBD limit is reduced by $5 for every $1 of passive income over $50k. At $150,000 in passive investment income, the small business tax rate is 100% wiped out, pushing corporate taxes up to the general rate of 27% - 31%.

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4 Solutions to Dodge the Clawback

• 1. Corporate-Class Total Return ETFs (Corporate Swap Funds): ETFs like HXS (S&P 500) and HXT (TSX 60) convert dividends into unrealized capital gains. Zero annual distributions means zero annual passive income.
• 2. Individual Pension Plans (IPP): Shift corporate earnings into a registered defined-benefit plan that shields investments completely from the $50k passive income test.
• 3. Corporate-Owned Permanent Life Insurance: Growth of cash surrender value inside exempt policies is not categorized as passive investment income.
• 4. Capital Dividend Account (CDA) Distributions: When capital gains are realized inside a corp, the 50% non-taxable portion enters the CDA and can be paid to shareholders 100% tax-free.

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Salary vs. Dividend Remuneration

Paying yourself a salary creates RRSP contribution room and reduces corporate active income, whereas paying eligible dividends triggers RDTOH (Refundable Dividend Tax on Hand) refunds to the corporation. Consult your CPA to optimize the annual mix.