When it comes to taxation in Canada, one of the most important concepts to understand is active business income. Active business income is income that a business earns through regular business operations, such as selling products or providing services. This type of income is subject to different tax rates and deductions than other types of income, such as passive income or investment income.

In this blog post, we will explore everything you need to know about active business income, including its definition, how it is taxed, and how it differs from other types of income.

Definition of Active Business Income

Active business income is income that a corporation earns from carrying on an active business in Canada. This income is derived from the regular operations of the business, such as selling products or providing services. It does not include income from investments, such as interest or dividends, or from rental properties.

Active business income is an important concept because it is subject to preferential tax treatment under Canadian tax law. The government provides tax incentives for businesses that generate active business income in order to encourage economic growth and job creation.

Taxation of Active Business Income

Active business income is taxed at a lower rate than other types of income in Canada. As of 2021, the federal small business tax rate on active business income is 9%, which is significantly lower than the general corporate tax rate of 15%.

In addition to the federal small business tax rate, many provinces offer additional tax credits or deductions for active business income earned within their borders. For example, Ontario offers a small business deduction that can lower the provincial tax rate to as low as 3.2% for qualifying businesses.

It is important to note that there are limits to the amount of active business income that can qualify for preferential tax treatment. The Canadian government has introduced several measures to prevent individuals from using corporations to shelter income and avoid paying taxes.

Differences from Other Types of Income

Active business income is distinct from other types of income, such as passive income or investment income. Passive income, such as rental income or interest income, is subject to higher tax rates and fewer deductions than active business income.

Investment income, such as capital gains or dividends, is taxed at a different rate than active business income. The tax rate on investment income depends on several factors, including the type of investment and the amount of income earned.

Conclusion

In conclusion, active business income is an important concept for Canadian businesses and individuals to understand. It is income that is earned through regular business operations and is subject to preferential tax treatment. Understanding the tax implications of active business income can help businesses make informed decisions about how to structure their operations and can help individuals minimize their tax liabilities.

If you need assistance with understanding or managing your tax obligations related to active business income, consider consulting a tax professional. They can help you navigate the complexities of Canadian tax law and ensure that you are in compliance with all relevant regulations.