The $50,000 Passive Income Threshold

For Your Client

Your CPA has discussed the $50,000 passive income threshold with you. This article explains how investment portfolio structure affects when this threshold is reached. For tax advice and calculations specific to your corporation, consult your CPA.

What This Means for Your Corporate Investments

When your CPA discusses the $50,000 passive income threshold, they're explaining how passive investment income can affect your Small Business Deduction. This article focuses on the investment structure side of that conversation.

The Basic Concept:

When your corporation earns more than $50,000 in passive investment income in a tax year, your Small Business Deduction begins to shrink. For every dollar above $50,000, you lose $5 of small business deduction.

The Investment Connection:

How you structure your corporate investment portfolio determines:

What types of passive income you generate
How much counts toward the $50,000 threshold
Whether you exceed the threshold and trigger the reduction

How the Threshold Works (Visual Overview)

Below $50,000

No reduction

Small Business Deduction: Full benefit

Above $50,000

Reduction begins

For every $1 over, you lose $5 of deduction

Example:

If your corporation earns $75,000 in passive income:

Amount above threshold: $75,000 - $50,000 = $25,000
Reduction: $25,000 × $5 = $125,000
Your small business deduction limit is reduced by $125,000

Note: Your CPA can calculate the exact impact based on your corporation's specific situation.

What Counts as Passive Investment Income?

For investment portfolio purposes, passive income includes:

Interest income (from GICs, bonds, savings accounts) : 100% counts
Dividend income (from portfolio investments) : 100% counts
Capital gains : Only 50% counts toward the threshold
Rental income (in most cases) : 100% counts

Key Insight for Portfolio Structure:

Only 50% of capital gains count toward the threshold. This is why portfolio structure matters:investments that generate capital gains create less impact on your small business deduction than investments that generate interest or dividends.

Discuss with your CPA: They can help you understand exactly what counts as passive income for your corporation and calculate your current exposure.

How Investment Structure Affects the Threshold

Your investment portfolio structure determines what types of income you generate:

Interest-Heavy Portfolio

Generates: Interest income (100% counts toward threshold)
Impact: Higher risk of exceeding $50,000 threshold
Example: GICs, bonds, savings accounts

Dividend-Heavy Portfolio

Generates: Dividend income (100% counts toward threshold)
Impact: Higher risk of exceeding $50,000 threshold
Example: Dividend-paying stocks, dividend ETFs

Capital Gains-Focused Portfolio

Generates: Capital gains (only 50% counts toward threshold)
Impact: Lower risk of exceeding $50,000 threshold
Example: Growth-oriented investments, corporate-class funds

Important: This is about structure, not avoiding investing. The goal is to understand how your portfolio structure affects the threshold.

Strategies to Manage the Threshold

Some investment structures can help manage the threshold:

Corporate Class Funds

Convert interest/dividends to capital gains
Only 50% of capital gains count toward threshold
Help keep passive income below $50,000

Life Insurance

Tax-exempt growth inside policy
Doesn't count toward passive income threshold
Can serve as part of fixed-income allocation

Discuss with your CPA: They can help you understand how these strategies fit into your tax strategy.

What This Means for Long-Term Planning

The $50,000 threshold is not a reason to avoid corporate investing:it's a strategy consideration. Understanding how portfolio structure affects the threshold helps you:

Make informed decisions about how to invest corporate surplus
Coordinate investment strategy with your CPA's tax strategy
Optimize total wealth while managing the threshold
Build flexibility to adapt as circumstances change

This is not about avoiding corporate investing. It's about understanding how structure affects outcomes over time.

Next Steps: Coordinate with Your Team

With Your CPA:

Calculate your current passive investment income
Understand your exposure to the threshold
Discuss how investment income affects your tax strategy

With Your Investment Advisor:

Review your current portfolio structure
Understand what income types you're generating
Explore options for managing the threshold while still growing wealth

The goal: Coordinate tax strategy (CPA) with investment structure (Investment Advisor) for long-term results.

Important Notes

Tax Advice:

This article explains investment structure concepts, not tax advice
For tax calculations and advice specific to your corporation, consult your CPA
Tax rules are complex and subject to change

Investment Considerations:

Past performance does not guarantee future results
Investment structure is one factor among many
Work with your investment advisor to understand options

Professional Coordination:

This article encourages coordination between your CPA and investment advisor
Tax strategy and investment structure work together
Your CPA remains your primary advisor for tax matters

Full Disclosure

This content is for information and education only. It explains general concepts about how investment structure affects the $50,000 passive income threshold, but it is not personalized tax, legal, or investment advice.

Tax Considerations:

Tax rules are complex and subject to change
The $50K threshold and SBD reduction depend on your specific circumstances, province, and business operations
Always consult with a qualified CPA before implementing any tax strategy
Provincial variations in rates and rules may apply
Past tax treatment does not guarantee future treatment
This article does not replace professional tax advice