Canada: Managing Adjusted Aggregate Investment Income

As outlined in the March Tax Alert, the 2018 Budget includes a measure designed to slow the accumulation of passive investments within active corporations. This measure is based on a calculation that considers both the amount and the type of investment income earned in a corporation. Understanding this calculation will guide an investor in developing a tax-efficient investment strategy going forward.

The calculation

Aggregate investment income (AII) is carved out from active business income and is both ineligible for the small business deduction and subject to a higher tax rate than ordinary business income. The definition of AII remains unchanged with the 2018 Budget but has become the starting point for the calculation of adjusted aggregate investment income (adjusted AII). A corporation is entitled to $50,000 of adjusted AII. Thereafter, its small business deduction limit decreases by $5 for every additional $1 of adjusted AII and is completely eliminated at $150,000 of adjusted AII.

The calculations for AII and adjusted AII are:1

AII =  net income from property (rent, interest, royalties, etc.)
  +  taxable capital gains for the year (including gains from the sale of active assets)
  +  taxable dividends
  +  foreign investment income
  -  taxable dividends
  -  capital losses for the year
  -  capital losses from prior years applied in the year

Adjusted AII =  aggregate investment income
  +  taxable dividends not received from a connected corporation
  +  capital losses from prior years applied in the year
  -  capital gains from the sale of active assets

Key Differences

There are three key differences between AII and adjusted AII:

  1. Portfolio dividends, although not taxable2 and not included in AII, are included in adjusted AII. 
  2. Capital losses for the year only reduce adjusted AII in the year incurred, and only if there are adequate capital gains in that year against which they may be applied. That is, capital losses from prior years applied in the current year do not reduce a corporation's adjusted AII. 
  3. For the purposes of AII, a capital gain is income from property, regardless of the use of the asset that generated it. For adjusted AII however, as the purpose of this new limitation is to penalize corporations with passive investments, a carve-out of capital gains from active assets is permitted. For these purposes, an active asset is one used principally in an active business carried on primarily in Canada or by a related CCPC. 

These differences provide a roadmap to managing a corporation's adjusted AII and limiting its small business deduction clawback: 

Moving away from interest and dividends and toward capital gains
Only half of a capital gain is included in adjusted AII, and managing when a capital gain is triggered will provide a corporation with some control over its annual clawback.

Monitoring when capital losses are triggered
Capital losses triggered in a year in which there are no capital gains to offset are wasted for the purposes of adjusted AII. Triggering capital losses in years in which large capital gains are expected will make the most of the losses. Investors should meet with their advisors before the end of each year to discuss this timing. 

Purchasing appreciable active assets
Investors might consider (for example) investing in the building in which they operate. The capital gain from eventual sale will not affect adjusted AII, and if structured properly, related rent can be charged and treated as active income.

Tax-deferred distributions
Some investments can provide tax-deferred distributions. Consider, for example, a real estate investment trust (REIT). A portion of each REIT unit's distribution is a return of capital, which does not affect adjusted AII and is not taxable until the unit is ultimately disposed of. Limited partnerships and mortgage-backed securities are some other common types of investments that provide tax-deferred distributions.   

Off-balance-sheet investing
Investors might consider funding Individual Pension Plans (IPPs). IPPs allow for higher contributions than traditional RRSPs, and funding payments, administrative costs and investment costs are fully deductible to the corporation. However, growth of the plan assets is tax-deferred and thus does not affect adjusted AII.

Overfunding a life insurance policy
Life insurance policies provide the tax-deferred accumulation of investment assets (to certain limits), they do not affect adjusted AII, and they provide tax-advantaged distributions.     

The spirit of the small business rate available to private corporations is to provide business owners with more after-tax income to grow their businesses. This new measure is intended to curtail the ability to reinvest funds taxed at the small business rate which is consistent with Finance's original intent. Bear in mind, after-tax business income reinvested in passive investments within a corporation – whether taxed at the small business rate of 13.5 per cent or the general rate of 26.5 per cent – still provides an initial deferral benefit that corporations can continue to use. But with some strategic investing, the benefit can be maximized to its fullest extent. 


1 The calculations of AII and adjusted AII have been simplified here for illustrative purposes to include only common types of investment income.

2 Subject to 38.33 per cent refundable tax unless the dividend is received from a connected corporation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Collins Barrow National Incorporated
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Collins Barrow National Incorporated
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions