While holding investments in a professional corporation offers tax advantages, it’s important to be mindful of the taxation of passive investment income. If a professional corporation earns significant passive income (e.g., from interest, dividends, or capital gains), it may be subject to higher tax rates.
In certain cases, passive income exceeding $50,000 may reduce or eliminate access to the small business deduction. For example, if a corporation has more than $50,000 in passive income in a year, the corporation’s active business income (eligible for the small business tax rate) can be reduced. It’s important to manage passive investment income in a way that ensures the corporation remains eligible for the lower tax rate on active business income.