• Investment Taxation

Corporate Taxation: How Might the $50K Passive Income Threshold Work?

Do you do the limbo? As you probably already know, how low you can go reflects how flexible you can be. With the government’s recent corporate tax proposals sliding their way through the system, your most malleable, “on your toes” mad skills will also come in handy as you step through next year’s tax planning initiatives, and beyond.

In particular, on October 18, 2017, the government announced that its proposed tax measures would not apply to the first $50,000 of annual passive investment income earned within a corporation. So, if you can keep your earnings “bar” under that level moving forward (current corporate passive investments are expected to be grandfathered in), you should be in the clear. For example, if you earn under 5% annual interest on your $1 million passive investment portfolio, there should be no impact on your bottom line.

To date, I’ve not seen any additional details, which leaves plenty o’ unanswered questions. You, me and your accountant will likely receive little clarification until the government announces its 2018 federal budget, generally around February or March. In the meantime, I can only show you how I think the new rules might play out, and how they might create even more of an administrative dance-around for corporate investors. “Jack be limbo, Jack be quick” …

Under the limbo stick

For our illustration, I’ve used actual tax breakdown figures from the 2016 tax year (courtesy of CDS Innovation Inc.’s Tax Breakdown Service). I’ve assumed that my corporation has purchased a taxable $1 million balanced model ETF portfolio at the beginning of the year (using net asset value per-share figures from 2016). I’ve also assumed that only the 50% taxable portion of capital gains is included as income, rather than the total amount of capital gains realized. All other interest, eligible dividends and foreign dividends are considered to be passive investment income.

The income amounts received during the year are shown in the chart below. As we can see, there is $7,660 of interest, $5,547 of eligible dividends, $8,707 of foreign dividends and $359 of taxable capital gains, for a total income of $22,273. This total income figure is well below the proposed, $50,000 annual threshold (and may come as a bit of a surprise to most readers). If this were the portfolio’s only source of income, your corporation could probably invest over $2 million in passive investments and still pass under that $50,000 limbo stick without even breaking a sweat.


Example: Annual income earned on a $1 million balanced ETF portfolio

SecurityMarket Value
(Beginning of the year)
Interest Eligible DividendsForeign DividendsTaxable Capital Gains
Total Income$1,000,000$7,660$5,547$8,707$359
BMO Discount Bond Index ETF (ZDB)$400,000$7,648--$64
Vanguard FTSE Canada All Cap Index ETF (VCN)$200,000$12$5,547--
iShares Core S&P U.S. Total Market Index ETF (XUU)$200,000--$3,860-
iShares Core MSCI EAFE IMI Index ETF (XEF)$150,000--$3,798$295
iShares Core MSCI Emerging Markets IMI Index ETF (XEC)$50,000--$1,050-

Sources: CDS Tax Breakdown Service (2016), BMO ETFs, Vanguard Canada, BlackRock Canada


Be a limbo star

Although the income from our $1 million portfolio in the example above was nowhere near the $50,000 threshold, a significant portion of a portfolio’s income is also expected to come from realizing capital gains. At least we hope your investments grow over time!

Continuing from our example (once again, using 2016 net asset value figures), we find that three of the ETFs have year-end, unrealized gains (VCN, XUU and XEC), while two have unrealized losses (ZDB and XEF), as shown in the table below. If we sold the winning ETFs at year-end and left the losers untouched, we would realize capital gains of about $53,990 ($36,828 + $15,143 + $2,019). The taxable portion would be $26,995 ($53,990 × 50%).

If we add our original $22,273 of income to the $26,995 taxable capital gains, we end up with total passive investment income of $49,268, just squeaking under our maximum threshold limit.

Are you hip to the beat? By realizing some or all of your available capital gains each year, you can avoid building up deferred (unrealized) capital gains that could kick you over the limit in the future. For example, suppose your $1 million grows to $2.5 million after 20 years, and you haven’t realized any of the gains or stepped up the basis. Eventually, the annual dividends and interest will start to exceed the $50,000 threshold. When you finally realize your capital gains, they will be subject to the new, less favourable tax treatment (you could have mitigated this additional tax drag by realizing gains and stepping up your basis along the way). There may also be additional tax deferral benefits from the tax gain harvesting strategy I discussed in a prior blog.

Pretty nimble, eh? In short, keeping your tax-planning pencil sharpened throughout your investment experience could save you a tidy sum over the long haul. (One caveat: It is unclear if the government will still allow you to route the non-taxable portion of capital gains to your corporate capital dividend account, even if the total passive investment income remains below the $50,000 threshold.)


Example: Annual unrealized capital gains (losses) on a balanced ETF portfolio

SecurityMarket Value
(Beginning of Year)
Market Value
(End of Year)
Unrealized Capital
Gain (Loss)
BMO Discount Bond Index ETF (ZDB)$400,000$397,817($2,183)
Vanguard FTSE Canada All Cap Index ETF (VCN)$200,000$236,828$36,828
iShares Core S&P U.S. Total Market Index ETF (XUU)$200,000$215,143$15,143
iShares Core MSCI EAFE IMI Index ETF (XEF)$150,000$142,795($7,205)
iShares Core MSCI Emerging Markets IMI Index ETF (XEC)$50,000$52,019$2,019

Sources: CDS.ca Tax Breakdown Service (2016), BMO ETFs, Vanguard Canada, BlackRock Canada


No pain, no gain

Now for the tough love. Although the numbers in the examples above worked out perfectly, that was mostly dumb luck. In real life, it’s probably going to be a stretch to estimate how many capital gains you should realize each year to make best use of the proposed threshold. Here are four potential hurdles:

  • CDS Tax Breakdown Service report timing: CDS updates its Tax Breakdown Service annually – but in February, after year-end. Even if your corporation has a December 31st year-end, you won’t know your exact income before the December 31st cut-off point for realizing capital gains.
  • Foreign dividend income calculations: For Canadian-listed foreign equity ETFs, the distributions are net of withholding taxes. For tax reporting purposes, gross foreign dividend income figures are required. These would need to be estimated by grossing up the net figures.
  • Return of Capital (ROC) adjustments: The ROC portion of ETF distributions might not count as income. If that’s the case, you might have to manually back out ROC from the income figures you’ll find on your monthly brokerage statements.
  • Phantom or reinvested distribution surprises: As their ghostly name suggests, reinvested distributions don’t show up on your monthly statements, but the income is still taxable. If a significant phantom distribution occurs, you may realize more capital gains than expected.


Again, the ink is scarcely dry on this most recent revision to the proposed corporate tax revisions. Additional capital gains may have to be realized, and estimated income figures may have to be calculated to ensure that the combination of both does not exceed the $50,000 threshold. And that’s assuming the threshold itself doesn’t change before everything’s been said and done.

When more information is released, I’ll be sure to keep you up to date. Until then … you guessed it. We remain in limbo.

PS: If you’ve now got your favorite Chubby Checker “Limbo Rock” song worming its way through your brain, consider this a parting gift, from me to you.


By | 2017-11-07T16:46:02+00:00 November 7th, 2017|Categories: Investment Taxation|21 Comments


  1. Dr. MB March 13, 2018 at 5:15 am - Reply

    Hi Justin,

    With the recent government changes for the CCPC. Is it still a viable option to invest with the VCN & XAW in my CCPC? I wanted to simply buy and hold these 2 ETF’s in my CCPC for the long term.

    • Justin March 13, 2018 at 8:54 pm - Reply

      @Dr. MB: Based on the current net index dividend yields (2.80% for VCN and 2.04% for XAW), and assuming a split of 1/3 VCN and 2/3 XAW, you would need a corporation worth over $2.18 million before the new rules might impact you. Best to speak to your accountant and advisor about your specific situation to ensure that you’re aware of any tax implications of your investment plan.

  2. Anne March 10, 2018 at 7:02 pm - Reply

    After the recent budget, I’m still not clear if the entire cap gain, or just the 50% that is taxable, will be considered passive income? Given that the 50K limit doesn’t come in till 2018, should one realize gains now (assuming a corporete year end in some month yet to come)?
    In the event of a pure Holdco, with no active business income, nothing changes, right?

  3. Miwo January 26, 2018 at 11:06 pm - Reply

    Hi Justin,

    I am planning to invest over 500K into equities. I really like the couch potato portfolio for its simplicity. However, I have a CCPC as well. Should I definitely be looking at deploying the 3 fund strategy with XUU, XEF, and XEC versus using VXC or XAW . I also want to only use laddered GIC for the fixed income portion.

    My concern is that if I use 75% VXC and 25% VCN for my equity portion it would just be simpler and you often talk about the balance of simplicity versus optimizing MER and taxes.

    Any suggestions appreciated.

    • Justin January 28, 2018 at 7:26 pm - Reply

      @Miwo: If you prefer simplicity over optimizing every last basis point, then holding XAW would be easier than holding XUU/XEF/XEC.

  4. Phil November 11, 2017 at 11:58 pm - Reply

    Hi Justin, I always look forward to your posts no exception with this one. I usually keep it on the shorter side but I do have a few questions. Since this limit has been declared I’ve been thinking about how to maximize the use of a corp within the context of an rrsp Tfsa and non reg accounts for retirement saving and eventual retirement income. It seems that carefully managing accrued capital gains and perhaps changing direction with the corps holdings over time could be important. Higher yields and capital gains should be fine in the early stages of building funds as they would easily produce less than the maximum 50 000. But as the account grows through continued contributions and the yearly passive income approaches the limit one could replace through cap gain harvesting their volatile holdings that produce cap gains and yield with more secure,maybe lower yielding options like GICs and build equity positions outside of the corporate structure to stretch the total amount held within the ccpc and stay under the income limit. Does this make sense? How would this affect which type of securities are best held in a corporate acct? Would a base of say VCN then perhaps some etf’s using swaps being turned over and moving towards FI overtime be practical? Thanks for your help sorting through all these changes.

    • Justin November 13, 2017 at 3:06 pm - Reply

      @Phil: The asset location decisions will be very dependent on your individual tax situation. For example, if you build up your corporate account as much as possible (ignoring the $50K threshold) and withdraw your dividends in retirement when you have little to no other income, there could be significant tax deferral benefits of this strategy (more than if you just held lower yielding fixed income in your corporation once you reach the $50K threshold).

      • Phil November 14, 2017 at 6:34 pm - Reply

        Ok so the deferral benefit could still out weigh the higher taxes which would come into effect after the 50k threshold. With this in mind it seems that particularly near the end of a working career this would be most beneficial as there would be a shorter time lapse before withdrawal at a lower rate. Good idea thanks justin.

        • Justin November 14, 2017 at 7:09 pm - Reply

          @Phil: You’re very welcome – I’ll be releasing a blog on this specific topic shortly.

  5. Shawn November 10, 2017 at 1:04 am - Reply

    @D: HXDM? Had no idea this ETF existed. Thanks for bringing it to my attention. Any idea what the Horizons EAFE Futures Roll Index is? Is it Horizons’ version of the MSCI EAFE? Don’t mean to derail this great post just kind of curious.

    • D November 10, 2017 at 5:15 am - Reply

      ‘The Index reflects the returns generated over time of notional investments that represent a long position in a series of futures contracts on the MSCI EAFE Index’….whatever that means.
      Personnaly, I haven’t invested in HXDM yet. I am keeping an eye on it during the next year to see if it adequately hugs the total return of the MSCI EAFE Index before diving in.
      My wishlist would of been a total return swap etf from Horizon to replace XAW / VXC in taxable corporate accounts in the future if Morneau’s passive income changes go through.

  6. LW November 9, 2017 at 3:39 am - Reply

    I personally use HBB in my corporate acccount to hold my bonds to minimise distributions.

    As someone with a large corporate portfolio this proposed tax modification affect me directly.

  7. frank November 7, 2017 at 4:10 pm - Reply

    “(One caveat: It is unclear if the government will still allow you to route the non-taxable portion of capital gains to your corporate capital dividend account, even if the total passive investment income remains below the $50,000 threshold.)”

    Is this still on the table? Or is the above comment unrelated to the converting income into capital gains proposal that I believe was shelved?

  8. Park November 7, 2017 at 6:29 am - Reply

    The use of swap based ETFs, as a way to mitigate the effects of the $50,000 limit, would expose one to the risk that the government changes to tax status of such ETFs. With swap based ETFs, investors and investment companies do well, at the expense of the government. Since the government sets the rules, I’m not certain how long this will last.

    • Justin November 7, 2017 at 11:26 am - Reply

      @Park: If the investor intends to realize some capital gains each year, the risk of the government changing the tax status of swap-based ETFs may not be as much of an issue in corporate accounts going forward.

  9. D November 7, 2017 at 3:39 am - Reply

    Hi Justin,

    I was wondering if swap based etfs such as Horizon’s such as HXT, HXS, HXDM,HBB will be extremely useful now in corporate accounts?
    Since they do not have any distributions and everything is capital gains, we would have more control on the annual passive income and more room to do tax gains harvesting.
    Of course, this is for someone with a large size portfolio for whom the 50 000$ is too low and who is comfortable with the risks of swap based etfs.



    • Justin November 7, 2017 at 11:24 am - Reply

      @D: Using swap-based ETFs would likely make the portfolio administration much easier (if investors prefer to realize some capital gains each year).

      • frank November 7, 2017 at 4:13 pm - Reply

        Would that mean, in a very simplified sense, that one would limit the realization of gains from a swap-based ETF portfolio held by a corporation to <$100,000 (50% = $50,000) per year in order to avoid going over the passive income threshold?

        • Justin November 7, 2017 at 4:45 pm - Reply

          @frank: That’s my best guess on how the $50K passive income threshold rules might work. So if you are invested in only swap-based ETFs within your corporation, you may want to consider realizing about $100,000 of capital gains each year (that is, if the government still allows half of this amount to be paid out to shareholders tax-free).

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