The Passive Investment Income Rules: Understanding the Impact on Your Business

July 10, 2024

With the increase in the capital gains inclusion rate from 1/2 to 2/3 effective June 25, 2024, passive investment income could be higher in your corporation. Now is the time to revisit the potential reduction to your small business deduction.


What is passive investment income?

Many small businesses may have earnings that they have retained in the corporation that are not needed for the ongoing business activities. These funds are placed in an investment account as a financial planning vehicle. Any income from that investment is called “passive investment income”. Dividends, interest and 2/3 of any realized capital gains are considered passive investment income.


At the same time, businesses apply the Small Business Deduction (SBD) when they file taxes. Canadian-controlled private corporations (CCPCs) are taxed at the small business rate for the first $500,000 of Active Business Income (ABI) (9% Federal tax rate). For amounts over $500,000, ABI is taxed at the general Federal tax rate of 15%.


Why were the passive investment rules introduced?

Because of the lower business tax rates versus personal tax rates, the Federal government felt that corporations could invest higher amounts than individual investors, which gave business owners an unfair advantage over individuals.


In other words, the business had more after-tax dollars to invest than if the money was withdrawn to a shareholder, personally taxed, and then invested. Although funds are taxed eventually when withdrawn from a corporation, the tax deferral advantage allows the investments to compound for years, resulting in a larger after-tax total down the road.


How do the passive investment rules work?

The rules set a threshold for how much passive income a CCPC (and corporations associated with it) can earn without the passive investment income reducing the corporation’s small business deduction. Basically, a CCPC can earn up to $50,000 per year and maintain the full $500,000 SBD. Every dollar of passive income above the $50,000 per year threshold will reduce the corporation’s SBD by $5 completely eliminating it once passive income is over $150,000*.


A simple example: A business with a $1 million portfolio that generates $50,000 of passive investment income, is onside and within the threshold. On the other hand, a business with a $2 million portfolio generating $100,000, would have its SBD reduced by $250,000.



What is the impact on your business?

In general, the income eligible to be taxed at the small business rate declines as your passive investment income grows, as shown in this chart:

The impact on your business will depend on your active income, passive income, and the province in which you do business.

Planning can be completed to maximize the small business deduction by reducing the corporation’s passive investments. This can be accomplished by reviewing the invest mix of the corporation’s assets and repaying shareholder loans, distributing assets to shareholders by way of capital or taxable dividends, or by purchasing permanent life insurance since the growth in the policy is not included in the passive investment calculation (unless the funds are withdrawn).



For more information on the passive investment income changes and how they will affect your corporation, check out this Passive Investment Income Calculator.


References

*The provinces also have an SBD and mirror the federal SBD reductions for passive income. However, Ontario and New Brunswick do not mirror the federal rules with respect to the reduction to the SBD so for these provinces, there is only the federal reduction and no corresponding reduction to the provincial SBD.

Why Young People Should Consider Life Insurance Before 35

October 23, 2025
Most people in their 20s and early 30s don’t think much about life insurance. At that stage, you are often focused on building your career, paying off student loans, saving for a house, or starting a family. Working with a financial advisor like Dream Financial Planning can help you see how life insurance planning fits into your bigger picture. Let’s find out more.. Lock in lower rates One of the main advantages of buying term life insurance or permanent life insurance before age 35 is cost savings. Premiums are based on age and health. That means the younger and healthier you are, the less you usually pay. Waiting until your 40s can mean higher costs or difficulty qualifying due to your health issues. Do it now while it is cheaper Protect the people who depend on you Even if you don’t have children yet, you may have people who rely on your income. That could be a partner, parents, or siblings. Life insurance provides coverage that can help with living benefits, debt reduction, or education costs. For young parents, it can also support RESP contributions, childcare, or everyday family financial planning. Cover debts and major expenses Many young adults carry student loans, car loans, or credit card balances. These debts don’t always disappear if you pass away. Life insurance means your family isn’t left burdened. It can also protect a mortgage, safeguard your home, and help with estate planning. Plan for the future Life insurance is not only about covering the unexpected. It can be part of your long-term financial planning strategy. Permanent life insurance can create tax planning advantages, support succession planning, and form part of small business financial planning or business tax strategy. Starting early gives you a massive advantage. Peace of mind Perhaps the most valuable benefit is peace of mind. Knowing that your loved ones are protected allows you to focus on your career and grow your savings.  Ready to explore your options? Life insurance has to be bespoke to your needs. The right plan depends on your stage of life, your goals, and your budget. I would be happy to help create a personalized financial and insurance plan

Is Leveraging a Life Insurance Policy Right for You?

October 8, 2025
Life insurance is often seen as a safety net for loved ones, but did you know it can also be a powerful financial tool during your lifetime? Whether you're planning your estate, managing corporate obligations, or simply looking to enhance your financial flexibility, leveraging a permanent life insurance policy could be a strategy worth exploring. What Is Life Insurance Leveraging? Leveraging involves using the cash value of a permanent life insurance policy as collateral for a loan from a third-party lender. This allows you to access funds while keeping your policy intact - potentially unlocking long-term financial benefits without disrupting your estate plan. Why Consider Leveraging? A life insurance leveraging strategy can offer several advantages: Tax-free death benefit: Your beneficiaries receive the insurance proceeds tax-free. Tax-advantaged growth: The cash value within your policy grows on a tax-deferred basis. Interest deductibility: If the borrowed funds are used for eligible investments, the loan interest may be tax-deductible. Capital Dividend Account (CDA) credits: If the policy is owned by a corporation, the death benefit may generate CDA credits, allowing tax-free distributions to shareholders. Who Might Benefit from This Strategy? Leveraging isn’t for everyone. You may be a good candidate if: You need permanent life insurance coverage. You have liquid capital to fund the premiums. You’re in a high tax bracket (personally or corporately). You’re comfortable with borrowing and understand the risks. You have access to strong tax and legal advisors. How Does It Work? Here’s a simplified overview of how a leveraging arrangement typically unfolds: Fund the Policy: You (or your corporation) make deposits into a permanent life insurance policy. Secure a Loan: The policy is used as collateral to obtain a loan from a lender. Invest the Loan Proceeds: If the borrowed funds are invested in eligible assets, the interest paid may be tax-deductible. Premium Deductibility: In some cases, if the borrower and policy owner are the same, a portion of the premiums may also be deductible. Repayment Upon Death: When the insured passes away, the death benefit repays the loan first. Any remaining proceeds go to your beneficiaries. Note: If the policy is corporately owned but the borrower is a personal individual, additional tax and legal considerations apply. Final Thoughts Leveraging a life insurance policy can be a smart way to enhance your financial strategy—providing liquidity, tax efficiency, and estate planning benefits. But like any financial decision, it’s important to consult with qualified advisors to ensure it aligns with your goals and risk tolerance.