Best Accountants in Stittsville, ON

How To Manage Passive Income In Corporate Accounts Did you know the passive income you earn in a corporate account could be eating up your tax benefit? In 2019, the Canada Revenue Agency (CRA) introduced the passive income rule, under which any business that earns more than $50,000 in passive income in a financial year will see its small business deduction (SBD) limit reduced by $5 for every $1. The $500,000 SBD limit will be exhausted once passive income reaches $150,000 annually. But why would you earn passive income in the corporate account? How Does Passive Income Rule Work? When you incorporate your business, your business gets its own identity. If you retain your earnings in the business, you pay a lower corporate tax rate. And if your business qualifies for the small business deduction (SBD), the federal corporate tax is 9% on your first $500,000 earnings. You don’t pay personal income tax unless you withdraw money from the business as a salary or dividend. The SBD limit brings no tax advantage if you withdraw the entire $500,000 in business income. But if you retain some after-tax earnings in the business, you defer your personal tax liability to the future and only pay corporate tax. It leaves you with more after-tax income in your corporate account. Instead of leaving money idle, you could invest it in stocks, bonds and other investments and earn passive income.