Updated: Dec 10, 2019
The 2018 budget measure affects a corporation’s access to the small business tax rate where its passive income exceeds $50,000.
The small business tax rate is generally the low rate of tax on a corporation’s first $500,000 of active business income. This $500,000 threshold is called the small business limit.
The budget tax measure reduces the small business limit by $5 for every $1 of corporate passive income earned above $50,000 in the preceding taxation year.
Therefore, the business limit would be reduced to zero at $150,000 of passive income. Passive income includes interest, rent, portfolio dividends and taxable capital gains from marketable securities.
A potential solution is to have your corporation re-position existing investment assets or divert new cash flow into either a permanent life insurance policy or a critical illness policy with a return of premium option, or both.
A corporate-owned critical illness policy is another strategy that may provide financial protection in the event you succumb to a critical illness.
These policies also help limit the amount of passive income earned in your company.
Critical illness policies have an optional return of premium (ROP) rider that enables the policy owner to receive 100% of the total premiums paid into the policy after 15 years.
In a sense, this strategy is a forced savings plan with critical illness protection – and the cost of this protection is the opportunity cost of the premiums.