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Maybe I misunderstand the taxation that BC is applying, but why should 'passive income' be taxed or treated any different to regular income for taxation purpose

Maybe I misunderstand the taxation that BC is applying, but why should 'passive income' be taxed or treated any different to regular income for taxation purposes. i.e if I earn $100 by working at a job, and $100 through renting out a property, shouldn't I be taxed the same as if I earn $200 through my job instead?

nickff 10y ago
I don't know why the BC government makes this distinction, but it does. The $100 from working at your job is taxed at a lower rate than the $100 from renting out a property, though I should add that there are various schemes to avoid paying the 'passive income' tax.
- sdm 10y ago
  This isn't actually the case now is it? Are you confusing corporate income tax with personal income tax? Normally if you're renting a place out you'd be doing it through a hold co. As the rental income would be your main business income it would be tax at the very low Canadian Controlled Small Business rate; not the general rate. Even if you were to take the unwise, for both legal and tax reason, choice to not use a hold co, income from rent is FUNDAMENTALLY different from regular income. In that, if you make a loss, you can claim it. That's just not possible with regular income. I.e., if you rental unit is unprofitable, it reduces your taxes in general -- potentially applied in future years. This is not the with "active" income.
TallGuyShort 10y ago
I'm also concerned about how arbitrary the line is between passive and active income. Let's say I rent out a lot of properties. I have legal obligations to maintain those properties. That might be a lot of work. A full-time job, even. Let's say I make a lot of money on investments. I might be ensuring the success of those investments by advising and doing research on / for the companies I'm investing in. Both of those things get called passive income, but they very well might not be in reality.
- skewart 10y ago
  Me too. Distinguishing between passive and non-passive income seems in any kind of technical, legal seems incredibly difficult. It reminds me of the old "I know it when I see it" definifinition of pornography, which is a terrible definition for a law. I'm actually really curious about the law now. Stock dividends must be considered passive income. So would interest from your local bank savings account. So would a SaaS app that you set up and basically runs itself with minimal maintenance.
- sdenton4 10y ago
  The term rent selling stats with 'rent' for a reason. The maintenance on any single property is miniscule compared with the rent extracted. Added over many properties, sure, might be a lot of work. But you're also getting a lot of rent. The bigger part of the problem is the tendency to pass on the tax on passive income to the tenant.
  - will_hughes 10y ago
    This is also why when someone has enough capital to buy enough properties to extract a full-time wage out of the rent, you can be sure they're also not going to be doing the work themselves. They'll offload it to a property manager/real estate agent to do all that work.
- SilasX 10y ago
  Very true! Given a sharp enough tax rate difference between two kinds of income (or two activities), you just generate a ton of socially-useless work aimed at blurring one into the other.
dangjc 10y ago
In a simple math world yes, but tax policies consider other factors like social equity, disincentivizing work/investment, compliance likelihood, etc.
roel_v 10y ago
"passive income" is not a tax term. Are you saying there should be a capital gains tax at the same rate as income taxes?
- caretStick 10y ago
  Why not? Someone working their ass off for $300k shouldn't pay more tax than someone banking $300k in "long term" capital gains.
- SilasX 10y ago
  The concept of passive income is used in tax laws, though in the US the term is "unearned income" (a term I really don't like).

nickff 10y ago

I don't know why the BC government makes this distinction, but it does. The $100 from working at your job is taxed at a lower rate than the $100 from renting out a property, though I should add that there are various schemes to avoid paying the 'passive income' tax.

sdm 10y ago
This isn't actually the case now is it? Are you confusing corporate income tax with personal income tax? Normally if you're renting a place out you'd be doing it through a hold co. As the rental income would be your main business income it would be tax at the very low Canadian Controlled Small Business rate; not the general rate. Even if you were to take the unwise, for both legal and tax reason, choice to not use a hold co, income from rent is FUNDAMENTALLY different from regular income. In that, if you make a loss, you can claim it. That's just not possible with regular income. I.e., if you rental unit is unprofitable, it reduces your taxes in general -- potentially applied in future years. This is not the with "active" income.

TallGuyShort 10y ago

I'm also concerned about how arbitrary the line is between passive and active income. Let's say I rent out a lot of properties. I have legal obligations to maintain those properties. That might be a lot of work. A full-time job, even. Let's say I make a lot of money on investments. I might be ensuring the success of those investments by advising and doing research on / for the companies I'm investing in. Both of those things get called passive income, but they very well might not be in reality.

skewart 10y ago
Me too. Distinguishing between passive and non-passive income seems in any kind of technical, legal seems incredibly difficult. It reminds me of the old "I know it when I see it" definifinition of pornography, which is a terrible definition for a law. I'm actually really curious about the law now. Stock dividends must be considered passive income. So would interest from your local bank savings account. So would a SaaS app that you set up and basically runs itself with minimal maintenance.
sdenton4 10y ago
The term rent selling stats with 'rent' for a reason. The maintenance on any single property is miniscule compared with the rent extracted. Added over many properties, sure, might be a lot of work. But you're also getting a lot of rent. The bigger part of the problem is the tendency to pass on the tax on passive income to the tenant.
- will_hughes 10y ago
  This is also why when someone has enough capital to buy enough properties to extract a full-time wage out of the rent, you can be sure they're also not going to be doing the work themselves. They'll offload it to a property manager/real estate agent to do all that work.
SilasX 10y ago
Very true! Given a sharp enough tax rate difference between two kinds of income (or two activities), you just generate a ton of socially-useless work aimed at blurring one into the other.

dangjc 10y ago

In a simple math world yes, but tax policies consider other factors like social equity, disincentivizing work/investment, compliance likelihood, etc.

roel_v 10y ago

"passive income" is not a tax term. Are you saying there should be a capital gains tax at the same rate as income taxes?

caretStick 10y ago
Why not? Someone working their ass off for $300k shouldn't pay more tax than someone banking $300k in "long term" capital gains.
SilasX 10y ago
The concept of passive income is used in tax laws, though in the US the term is "unearned income" (a term I really don't like).