What Counts In the Passive Investment Income Limits – The Devils In The Details

In 2018, the Federal government introduced limits on passive income for Canadian Controlled Private Corporations. This was an attempt to further limit their utility as a tax-deferral vehicle. Exceeding $50K/yr of passive income causes the small business deduction level for active business income to shrink at a rate of 5:1 and disappear with $150K of passive income.

That effectively bumps the tax rate of small businesses with a combination of higher active and passive income. New Brunswick and Ontario did not mirror this with the provincial portion of the small business tax, creating and intermediate zone that may even lower tax for some. This post describes what counts as passive income for this tax change in English. The Klingon version is in the tax measures document.

How is passive investment income calculated?

This is a key concept since it determines the active business income threshold starting in calendar 2019. Active business income is your income from operations (or clinical practice in the case of doctors). To keep it really simple [sarcasm] passive investment income for this sliding tax scale is going to be called… Adjusted Aggregate Investment Income (AAII).

If you hold multiple related corporations (eg a professional corporation and a holding company), the AAII from all of your companies is pooled do determine if you get SBD shrinkage for your active income.

Does Count as Adjusted Aggregate Investment Income

Interest, Canadian and foreign dividends all count.

This would be at their actual value. Not the gross up – that is for personal taxes.

For foreign dividends, I am not sure how foreign withholding taxes will be accounted for. I suspect that the dividend net of withholding taxes would be used. We do get a full or partial refund of some foreign withholding taxes depending on tax treaties that Canada has with the withholding country. The effect of this is likely small for most people (15% of U.S. dividends and 8-10% for most other developed countries).

The taxable portion (50%) of capital gains from investments count.

It is good that only the taxable portion is counted. That means $100K of realized capital gain would only count as $50K of passive income. However, there was also a nasty little nugget implanted. “Net capital losses from previous taxation years will be excluded. Previously, if you had realized a loss in a prior year, you could carry that forward and deduct it from a future gain. You can still do that to reduce the tax from the capital gain itself. However, you cannot apply those losses to keep you under the new income threshold.

As Gholum says – nasty tricksy hobbitses…

That is kind of nasty. For example, if you had a $100K realized capital loss a couple of years ago, then the taxable part ($50K) could be applied against the taxable part of a gain in 2019.

Let’s say you realize a $200K capital gain in 2019 which means a $100K taxable gain. You could apply the previous $50K loss to reduce that $100K to $50K to pay tax on, but you would still have $100K of passive income bumping down your permitted active income. That $50K over the passive income limit would reduce your small business threshold to $250K from $500K for 2020.

Does not count as Adjusted Aggregate Investment Income?

Interest from short-term bank deposits that are used for operational purposes do not count.

Realized capital gains from an asset used in the business do not count.

For example, let’s say you own the clinic in which you practice and make money selling it. Doesn’t count for the passive income threshold.

Realized capital gains from donation of appreciated stock to charity do not count.

These donations are excluded from aggregate investment income. Further, they can have the advantage of the whole capital gain being added to your corporation’s capital dividend account instead of just half. The capital dividend account can allow for the election of tax-free capital dividends.

Realized capital gains from selling a share in another CCPC that is connected to your CCPC where all or almost all the assets are from an active business do not count. 

What constitutes a related or associated CCPC can be complex, but basically it is when two corps have the same owner(s) or are related to the owner(s) and have to share the small business tax threshold.

“Under the proposal, if a corporation and its associated corporations earn more than $50,000 of passive investment income in a given year, the amount of income eligible for the small business tax rate would be gradually reduced”. This means that if say you have a corp for your active business (OpCo) and one for your investments (HoldCo), that the passive income from both counts towards the thresholds for your OpCo.

May or may not count.

Exempted insurance policies do not count.

Most life insurance with ancillary investment aspects in Canada, like Whole or Universal Life Insurance are structured to be exempt and do not count towards the passive income cap. However, there were law changes in 2016 to make policies used primarily for investment slightly more restricted in the amount of investment component allowed. Manulife has a full summary of exempt insurance policies. 

“Income from savings in a life insurance policy that is not an exempt policy will be added, to the extent it is not otherwise included in aggregate investment income.”

This also means that Annuity Payments count & Segregated funds do count.

Rental income, if it is not the active business, does count.

Rental income is considered passive unless rental real estate is the focus of the business. For the CRA, that means it has 5 or more employees to manage the properties. Another way that rental income can be considered active is if the rent covers more than basic services (space & utilities). Additional services that could make it active income would include services like provision of meals, security, and cleaning.

Are Investment Costs Deductible Against Investment Income?

There is nothing that I have found in writing on this. Presumably, the value used for passive investment income will be determined by adding up all of the above included-income. Then, subtracting deductible investment costs to give a net passive investment income.

What is normally deductible?

  • Interest on investment loans is deductible.
  • Interest, property taxes, maintenance or management costs would be deductible against rental income. Only the net profit from rental income counts as passive income.
  • A fee-based or fee-only portfolio manager or investment advisor would be deductible for the portion of the fee applying to your corporate accounts.
  • The fees for your taxable personal investment accounts would apply against your personal income (effectively giving you a discount at your highest marginal tax rate).
  • Indirect fees, like commissions or management fees buried in ETFs or mutual funds are not deductible.
  • Fees for financial planning not related to investment are not deductible.
  • Subscriptions to financial newsletters etc are not deductible.

Hopefully, I have helped translate some of the finer details for those who are interested in such.

If you have other information to add or questions, please post in the comments below. I am not an accountant – I am a doctor. However, I will do my best to answer and consult experts when unsure. That said, you will want to work with your tax experts on this. The information may change & I will try to update the post accordingly.


  1. Thanks for summarizing LD! Great detailed post.

    -However, there was also a nasty little nugget implanted. “Net capital losses from previous taxation years will be excluded“. –

    That is definitely a nasty little nugget! The government really has no qualms about stacking the cards in their favour eh? I guess this is targeting tax-loss harvesting as a strategy, as you can now only use it to deduct capital gains for that year and not carry it forward?


    1. Yes and no. I haven’t found anything about it affecting the actual tax paid on the capital gain. So you could presumably still use a loss to reduce the tax on a gain. However, it sure stacks the deck in favour of pushing people over their threshold into the red zone and more tax that way. Pretty tricksy.

  2. Advice for all Canadian docs- Start to really practice EXACTLY the way that you want. Running harder on the treadmill will likely be counterproductive. Thank you for the detailed outline Dr. LD. But hopefully from all this, it will help more docs realize that the best laid financial plans can fall apart quickly. We all need to learn to be nimble by taking care of the areas we can truly control- our personal expenses, our work schedules, our debt levels. If there is one truism that I have seen is that there is always change. Take time in your life to evaluate regularly if you can roll with any changes.

    I think I will chat with my accountant now….

    1. I 100% agree Dr. MB and thanks for your comment! You are cutting straight to the heart of why I am blogging about physician finances. I have recently been focused on technical details of planning, given the major changes happening and people’s anxiety around it. I am trying to show that there are many ways to financially adapt to them. However, behaviorally adapting is also vital. Money is just a two way exchange for time, effort, and some comfort/pleasures/experiences/security. If you don’t control your finances, or mistake money as the goal rather than the means to an end, then it will control you at the expense of those other priorities. Taking control of the areas you mention is key and gives you better capacity to adapt to the inevitable hiccups. One benefit of these sharply progressive tax raises over the past few years is that it did give me pause to re-balance by scaling back work in some areas. The time:money exchange rate shifted. I love my practice – I love it even more now that I practice exactly how and as much as I feel is optimal. I also have more time to focus on my other priorities – family, friends, and learning/building new things. I do look forward to getting back to writing about some of those (the fulfillment part of my blog logo).

  3. nice summary. If you limit passive income, then damage is controllable. The more I think about it, the more sense it makes to use swap ETF for bond, at the least.

    More good news, recent Ipsos poll shows federal conservative in lead.

    1. Thanks for your comment BC doc! There are so many ways to approach this. Swap-based ETFs are one option, but are relatively new products and have some risks (disclosure – I use HXT and HXX in my tax exposed higher growth/risk allocations of my portfolio). Another would be corporate class funds that largely convert income into capital gains and allow for tax-deferred return of capital to access cash while deferring realizing capital gains. They have higher mutual fund type fees, but also have a longer track record. I am planning a head to head comparison. Another approach is to pay a salary which both lowers active corp income (buying more passive income room) and also makes RRSP room. Putting the bond piece in the RRSP would be very tax efficient since it is sheltering income that would be taxed at full rate and paying that later, possibly at a lower rate (deferral and reduction). That would also allow room to focus capital gains, dividend payers, or growth allocations in other account types (Corp, TFSA, taxable) depending on the overall portfolio plan. I like the putting my eggs in multiple baskets approach to diversify against tax law change risk. Of course, if the bond allocation exceeds the room an RRSP would offer, then one may need other options and a swap ETF would be one. There are more approaches, but it will require full post(s) – currently in the cue.

  4. Question ?
    Would it make sense to purchase a rental property within the corp to diversify your investments. Would this income count as passive or active income.
    I understand problems start when one uses the property personally (the CRA assesses you for a taxable benefit on the personal tax side) or if you only rent it out for a few months and use it personally.
    Great blog

    1. Thanks for the question Jeff. Real estate in multiple forms could be a good alternative investment to diversify a portfolio. It requires a more sophisticated investor to do well at it. That is not me for real estate. Dr. Networth at http://www.drnetworth.com is knowledgeable.

      It is my understanding that you cannot hold real estate in a professional corp that is not ancillary to your practice. If you hold rental property in another corp with less than six employees, then it is considered a “specified investment business” and does not get the small business tax rate. I have given Dr. Networth the heads up on your question.

      1. Just adding my 2 cents to Jeff’s question. According to my accountant (who deals exclusively with physicians), having 1 (at most 2) rental property held in your MPC is “fine” in his opinion. However, if you are thinking of acquiring multiple rental properties, then you need to set-up a Holdco which then holds the rental properties through an additional Real Estate Holdco. So, it’s important to decide which path you want to take. I decided a few years ago to acquire multiple rental properties through Joint Ventures, so I set-up a Holdco and RealEstate Holdco.

        Rental income and capital gains from selling property (just like stocks) in a Holdco will be counted towards the $50k passive income limit. However, net rental income can be essentially reduced to zero through CCA (Capital Cost Allowance) “property depreciation”, but is recaptured when you sell the property. You are basically deferring the tax on rental income until later. For avoiding capital gains, refinance is a strategy to unlock the built-up equity in the rental property without paying capital gains. So, there are many tools available to bypass the $50k passive income limit when it comes to rental property.

        Hopefully this answers your question Jeff. I hope I didn’t scare you or anybody else away from thinking about purchasing a rental property via MPC/Holdco. There is a bit of a learning curve at the beginning, but it is definitely worth it for building long-term wealth, in my opinion.


          1. Add-on Question if you are willing…

            My corp owns the clinic in which I practice. There are some extra exam rooms, and a few other docs rent space from me. I pay for cleaning/snow removal etc…, everything a landlord would…

            Would these rental incomes be considered passive income? or ancillary to my medical practice? or something else?

            Thanks in advance.

          2. Hi Yoder. That is an excellent question! You should definitely check with your accountant, but my understanding (as a non-CPA) is the following. Being ancillary to the practice means that the real estate can be legitimately held in the corporation. Capital gains from it would be active income since it was actively used in the business. Rental income if you have under 5 full-time employees is usually considered passive investment income.

        1. Dr. Networth – might you be able to refer me to your accountant? I’d love a professional consult on maximizing tax efficiencies for real estate in holdcos. i would consider moving all my tax business to the right accountant

          Thank you!

          1. Hi Kate,

            My primary accountant deals predominantly with physicians. He has helped with the set-up of my Holdco structure with the help of a real estate lawyer. However, he does not specialize in real estate accounting.

            The accounting for my real estate holdings with my JV partner was done by another accountant. But we recently switched accountants, as the previous accountant (well known in the RE industry) was charging too much. So, a bit too early for me to give a recommendation or not for this new accountant.

            As you probably know, it can be difficult to find the right accountant for your needs. Possible places to ask for a good accountant would be the REIN forum or even some of the real estate investors who posted their Investment Story on my blog.

  5. On the bright side, I think most docs would be ok with 3 million in corporate savings generating 150 k of annual income. Add on cpp, non registered , tfsa and rrsp income and the numbers are even higher.

    The low ratio of doctors per capita in Canada will be a problem when doctors decide to
    1) stop working at 220 k after rrsp deduction as top marginal tax rates are insane (53.5 % Ontario)
    2) stop working in the red zone
    3) leave more difficult and stressful work
    4) take more vacations
    5) job share
    6) become cruise ship doctors
    7) move


    1. Thanks Jeff. I agree that with a range of tools docs can put together a decent passive income portfolio moving forward. It will be trickier for those who are close to retirement with all their eggs in the CCPC basket, but I have some ideas for those folks too.

      One positive for physician health that may come out of the series of cutbacks and tax hikes is that it may give some docs pause to evaluate and choose a better work life balance. It has for me & I am happier for it. I am on a three week vacation and it won’t be my last this year. Gotta take this time with my kids while they are still young enough to think vacationing with me is cool ?

      1. I hear you LD. We are on the same page.

        I gave up my shifts this coming August to my partners, so that I will have the whole month off for an extended family vacation trip to Asia. I started giving up shifts (locums) to my partners last year to have more time off, and it’s been great! Happier and healthier.

        I must say that it felt weird (self-guilt) giving up shifts at first at my age, but now that I’ve started to scale back, it feels “normal” now to have all this time off.

        1. Way to go! That sounds great. It is funny how easy it is to fill the time off medicine, but was an adjustment for my family and I. Now if I work two busy weeks of call in row, we really feel it while before that was totally normal.

  6. Good discussion. want to check if my assumptions are correct under the new rules.
    1) If one doesn’t qualify for SBD, (combination of passive/active income), do you pay the higher rate for current year on the amount exceeding (not the whole amount)? and you won’t lose qualification for CCPC SBD next year (so recalculate again based on passive/active mix)?
    2) I can see how one can accumulate a high 7 figure portfolio and still have some room for contribution (7-8M with 1.5% net yield for 110K passive income, leaving 150-200K space), but with a large capital gain. Does the new rules affect future capital gains treatment? (currently it’s 50% tax free personal, 25% tax and reminding in corp).

    1. Good questions. I don’t think we’ll know exactly how they’ll do it until the legislation goes through.

      My guesses:
      1) I suspect that it will be on a year by year current tax year basis. That will make knowing where you stand as you go through the year vital if you are close and need to up your salary or give a bonus to decrease your active income. That approach would stack the odds of you accidentally going over in their favour which would fit their theme.
      2) If it were me, I would want more than 1.5% yield. If I had 8 million dollars [cue the Bare Naked Ladies music], I would likely have a higher proportion of “fixed income” than normal since I’d already “won the game” and would want to protect assests, but I would also want an overall portfolio yield higher than 1.5% since that would barely cover loss to inflation. I would stack the interest bearing stuff in my RRSPs and focus some capital gains or “return of capital” focused investments in my corp since that effectively increases the amount of passive income I could draw from my corp by double (only the taxable half of capital gains counts still). Depending on your life phase, I would have growth or dividend income in my TFSA and taxable accounts. If still needed more fixed income room to get my balance, I would consider some whole or universal life insurance in the corp, but that needs a fifteen to twenty year lead time to do properly. I think to effectively grow a portfolio that size, you would need to use multiple approaches beyond the corp. If I had 8 million dollars, I would also buy some gourmet ketchups for my Kraft dinner?

      1. LD, lots of good points in this comment, but I want to challenge you on “I would also want an overall portfolio yield of higher than 1.5% since that would barely cover loss to inflation”. Putting aside the issue that you must have a lot of non dividend paying stocks and/or swap based ETFs, which may or may not be a good idea, (or directly owned RE heavily financed, which is a another ball game altogether), it is really the total return of your investments that matters, not the yield. Similarly, what also matters is whether the total return keeps up with inflation, not the yield. Do you agree, or do you have another take on that?

  7. Sorry for the necro post! Getting backup to speed with your posts. I was wondering if you know/heard anything about how Canadian Venture Capital investing would fit into AAII? I have been considering dabbling a bit into this brightspark Canadian opportunities fund which invests in private Canadian companies.. so in principle should not count but I don’t want to have to setup an extra corporate structure or anything to get the benefit.

    1. Hi TM,

      I am unfamiliar with the specifics of the investment you are talking about. With private equity investing, you generally lock your money into the investment for a defined period. The managers then distribute money/income back each year and that can take many forms. It could be return of capital (doesn’t count as AAII), income, dividends, or capital gains (which would). You don’t really control how/when that is distributed which can make it difficult if close to the SBD threshold. However, I would imagine that managers would be sensitive to doing this in a tax-efficient way, if possible.

      1. Thanks LD

        Yeah it seems like a bit of a niche thing, going to ask my accountant as well, if I pursue it and find out more i’ll report back. Not alot out there on alternatives from a medical CCPC (aside from real estate), I know MD Mgmt had some blackrock fund but i don’t think it was Canadian specific.

        i know around the time of the tax changes there was some memo from feds about how they wanted to make sure changes to corp tax would exempt income from Cdn VC but i don’t see it anywhere in the actual legislation

        1. That would be great TM. I did explore the MDF Blackrock fund and it was actually internationally slanted (Canadians tend to have a strong Canadian bias in the rest of our alternative investment portfolios so that was interesting from a diversification standpoint). That fund would likely have as much deferral via return of capital at the beginning as possible and it is common for these investments to spit out their income towards the end of the term. In the end, it was a bit too black-box-like for my tastes.

  8. If you retire and no longer have any active business income, and only use dividend payments (from mutual funds) for living expenses, is there a certain threshold of dividends you are allowed before the tax on dividends starts ? I thought it might be around $30,000.00 or $40,000.00, but maybe that only applies if you still have active business income.

    Are dividends received from mutual funds considered capital gains dividends ?

    If your only source of income is dividends, is the marginal tax rate based on the amount of the dividends, or on your pre-retirement income amount ?

    Thank you for your time.

    1. Hi Glenn. Thanks for the questions.

      1) The issue with dividends is that the company issuing them has already paid some tax. So, you pay a lower tax rate on the dividends to account for that (tax integration). So, if you are paying dividends (and no other salary), then the first $50K or so (if eligible dividends) don’t have net personal tax. The corp already paid tax on that income. With ineligible dividends, there is pretty always some tax since the the corp only paid tax at the low small business rate.

      2) Mutual funds pay out in a variety of ways depending on the underlying investments. It can be a combination of return of capital (from investments sold in managing the portfolio), eligible dividends (from Canadian stocks), and interest/income (from foreign stocks or any bonds in the fund). They give that breakdown on the tax forms they send you each year.

      3) Your marginal rate is based on the year you draw the income from your corp.

      I touch a bit on tax integration and investment income here.


  9. Thank you very much for your reply.

    If the source of the dividends is a Canadian mutual fund (Canoe), earned through a professional corporation (earnings under $500,000.00), are those considered eligible or non-eligible dividends ?

    Thank you again.

    1. Hey Glenn. The mutual fund company doesn’t matter. It is what the fund holds. If it holds Canadian stocks, those would be eligible. If holds others then it is income. For dividends from a small corp, they are ineligible. A small corp can give some eligible dividends if they receive eligible dividends from investments.

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