The federal budget’s introduction of reducing professional corporation’s deduction limit due to passive income was definitely one of the most devastating change made to professional corporation since it was introduced. Yesterday’s news from the Ontario government came with a real surprise. In their Ontario Economic Outlook and Fiscal Review, the government has announced that Ontario will not parallel the new federal restriction for the small business deduction (SBD) based on passive income on CCPC (which includes professional corporation). Consequently, all eligible Ontario small businesses will continue to receive the Ontario small business deduction.

What does that mean to you?
We would use the maximum passive income of $150,000 as an example to illustrate the difference the announcement has made. If your corporation is generating a $150,000 of passive income from your investment portfolio or rental income, your professional earned income will be taxed at a higher rate of 26.5% (15% federal and 13.5% Ontario) as opposed to the small business rate of 13.5% (10% federal and 3.5% Ontario). If Ontario does not parallel the federal restriction on passive income, only the higher federal tax will be applied and as such, your professional earned income will only be taxed at 18% (15% federal and 3.5% Ontario), not 26.5%.

We were very excited about the news that could not wait to share this with you before we wrap up the week. Please reach out to us if you have any further questions about the announcement. Details of the Ontario Review can be found in the following article summarized by PWC.

https://www.pwc.com/ca/en/services/tax/budgets/2018/ontario-economic-outlook-fiscal-review.html

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