Passive investment income

Passive investment income is what a company earns from holdings such as investments rather than from running the business. It matters in a sale where a company holds cash or investments inside the corporation: ask what the income from them does to the small business deduction.

How it is measured

The CRA’s T2 guide says a Canadian-controlled private corporation’s business limit is also reduced by income from passive investments, earned by the corporation and the corporations it is associated with. The guide says this is worked out in Schedule 7 as adjusted aggregate investment income. The Income Tax Act defines that term in section 125(7), by reference to aggregate investment income in section 129(4). The CRA’s T2 guide also says the Ontario and New Brunswick small business limits are not subject to the federal passive income business limit reduction, so check the province where the company earns its income.

What to check or ask

• Which investments the company holds, and in which year the income was earned
• Whether associated corporations earn passive income that is counted together
• How the accountant calculated Schedule 7 for recent years

Compare business limit and read the cash-holding answer.