What is the purpose of the Small Business Deduction?
The Small Business Deduction (SBD) allows eligible businesses to allocate tax savings towards investments in their growth. The SBD allows an amount of eligible corporations’ Active Business Income (ABI) to be taxed at the reduced SBD-rate.
What is the maximum income that can be taxed under the Small Business Deduction rate?
The maximum ABI that can be taxed at the SBD-rate is called the Business Limit (BL), and is currently $500,000, federally.
Is the Small Business Deduction available to my corporation?
This deduction is only available to Canadian-Controlled Private Corporations (CCPC) with less than $15 million in taxable capital currently employed in Canada. A CCPC’s BL will decrease linearly from $500,000 to $0 as their taxable capital increases from $10 – 15 million.
How do the SBD rules treat associated CCPCs for the purpose of the SBD limit?
To prevent a business benefitting from operating through several CCPCs, associated CCPCs must agree to split a single SBD limit. The BL of each associated CCPC is limited to their allotment of the overall SBD limit, and all the allotments among a group of associated corporations must add up to $500,000. Two CCPCs are considered associated if one CCPC controls the other, both are controlled by a third-party, or the people controlling each are related to those controlling the other and one of the controlling parties owns more than 25% of both CCPCs.
My business income is passive. Can I still benefit from the Small Business deduction rules?
The SBD only applies to ABI, which excludes passive income by definition. SBD rules generally presume income is active and exclude businesses intended primarily to passively collect interest from properties – or Specified Investment Businesses (SIB).
Some passive income is exempted from the SIB characterization. The following businesses can consider their income as active for the purposes of SBD rules: businesses which lease certain property, credit unions, or businesses employing five or more full-time employees a year (or using equivalent services from an associated corporation).
