Tax Question:
How do you ensure your rental income within your corporation is active business income? Why would this be a good idea?
Facts:
Under the Income Tax Act, rental income is generally considered passive income and does not qualify for the small business tax rate. However, in certain cases, rental income can be considered active business income and may be eligible for the small business tax rate.
Generally, to ensure your rental income is considered active business income, the CRA indicates you must rent to a related active business or employ 5 full-time employees.
If the rental income is earned through an associated company that is in an active business, the corporation’s rental income qualifies for the small business credit, but the credit is shared between the associated corporations. The rent charged to the associated company must be at a fair market value.
How is Active Business Income Taxed versus Passive Rental Income?
The combined federal and provincial tax rate for active business income of a CCPC in British Columbia depends on the level of income earned.
For the 2022 tax year, the combined federal and provincial small business tax rate for CCPCs in British Columbia is 11%, which applies to the first $500,000 of active business income. For active business income above $500,000, the combined federal and provincial small business tax rate increases to 27%.
Passive rental income is included in the calculation of aggregate investment income, and taxed at a combined rate in British Columbia of 50.67%. Included within this tax rate on investment income is a refundable tax of 30.67%, which gets refunded at 38.33% of the dividends declared during the year, up to the maximum refundable tax paid. This creates a net corporate tax rate of 20% on rental income, but does not factor in the personal tax you must pay to achieve this rate.
It’s important to note that these rates are based on BC and federal combined rates and are subject to change, and there may be additional taxes or fees that apply to small businesses depending on their activities, location, and other factors. It’s always a good idea to consult with a tax professional or accountant for specific advice related to your business.
Helpful Tips
Here are some steps you can take to help ensure that your rental income is classified as active business income:
By taking these steps, you can help ensure that your rental income is classified as active business income, which can have tax advantages and may also help protect you from legal liabilities.
References
Small Business Tax Rate in British Columbia
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Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.
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