Passive income is income a corporation earns from investments rather than active business, such as interest, rent and portfolio dividends, and it is taxed at a high refundable rate.
The CRA distinguishes active business income from passive investment income. Passive income, interest, most rents, and portfolio dividends earned inside a corporation, is taxed at a high rate (part of it refundable through RDTOH) to remove the advantage of sheltering investments in a company.
Passive income also grinds down the small business deduction: a CCPC earning more than $50,000 of passive income in a year loses $5 of its $500,000 business limit for every $1 over the threshold, with the limit gone entirely at $150,000. Managing passive income is therefore central to preserving the low small business rate.
A corporation earns $80,000 of passive investment income. That is $30,000 over the $50,000 threshold, reducing its small business limit by $150,000, so only $350,000 of active income now qualifies for the low rate.
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