How New Passive Income Rules Affect Small Businesses

Amendments to the government’s passive income rules may be disadvantageous for small businesses, according to Canadian Federation of Independent Business (CFIB) president Dan Kelly. Specifically, the rules may hinder the companies’ growth potential.

While he said the implementation was good news because the government is starting to understand how important passive income is to businesses, the rules may prevent small businesses to expand.

Kelly explained, “If administered properly, this change will be helpful in allowing many small firms to continue to use passive income to ride out challenging times, save for investments or set aside money for a leave or retirement.”

The change was announced by Finance Minister Bill Morneau, who stated that small businesses will be handed a $50,000 threshold on passive investment income each year, reports Wealth Professional Canada. Some think the threshold isn’t high enough for small companies who want to grow.

Morneau was quoted telling CBC that passive investments are being used by many corporations to save money for the future. He said, “For the vast number of corporations, this isn’t a problem. But in a very small number of cases, it gives wealthy people an unfair advantage over and above everyone else.”

The government believes only 2 percent of private corporations are storing about $300 billion in private investment accounts. Morneau continued, “This is money that’s not being invested into active businesses, and it is money that’s generating an additional $20 billion a year in passive investment income.”

Kelly noted that CFIB will monitor the changes to see what happens and how they will impact small businesses: “These are incredibly complicated tax changes with many potential unintended consequences. When the entire package of revised proposals is out later this week, we will review them with tax professionals to provide an overall assessment on the net impact for Canada’s small business owners.”


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