42 What is Active Business Income and Aggregate Investment Income?

Corporate tax rates are based upon the type of income rather than focussing on the amount of income (as we see with the progressive tax rates used on individuals).  In general, the Canadian government would like to see corporations used for active business activities (like manufacturing, processing, selling things etc.) rather than passive income activities (like receiving interest revenue or dividends).  To achieve this goal, the government taxes Active Business Income (ABI) at a very low rate and Aggregate Investment Income (AII) at a very high rate (albeit some of this amount is refundable).

Here is a brief definition of ABI and AII

Active Business Income

Per ITA 125(7), active business income “means any business carried on by the corporation other than a specified investment business or a personal services business…”.  For purposes of achieving the most favourable Canadian tax rates (see ‘Small Business Deduction” later in this book), this Active Business Income must be generated in Canada.

Aggregate Investment Income

AII is basically all your passive income that isn’t being taxed under Part IV.  ITA 129(4) “Aggregate Investment Income” has the details of the AII calculation, but the basic formula is as follows:

• Taxable capital gains net of allowable capital losses for the year.  I.e. the amount in 3(b) when calculating NITP – 129(4)(a)(i) & (ii)
  • Less: Net capital losses deducted under Division ‘C’ – 129(4)(a)(iii)
• Property income for the year (Canadian and Foreign) – 129(4)(b)
  • Less: Dividends deducted under Division ‘C’ – 129(4)(b)(iii)
  • Less: Property losses for the year – 129(4)(b)

This Aggregate Investment Income will be used in calculating the Additional Refundable Tax discussed later in this book.

March, 2020