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THE SMALL BUSINESS DEDUCTION IN CANADA

Interested in how the small business deduction in Canada can save you money through a special tax rate? If so, we’re here to help!

 

Are you making the most of your small business deduction?

As an owner of a small business in Canada, you may or may not have heard of the small business deduction available to you. You have worked hard to grow, and already know that making the most of every dollar is crucial to your survival. However, what you may not know is this: “How does this deduction actually help me save money?”

If you do own and operate your own company, then it is very important you read this article. In it, I will show you how you can utilize this great tool to save a lot in taxes and use those savings to bring you towards your goals.

WHAT IS THE SMALL BUSINESS DEDUCTION CANADA?

The small business deduction (SBD) is a credit available to specific kinds of companies in Canada. It is performed on active income, and reduces the general corporate taxation percentage from 26.5% to only 15.5%. The limit for this reduction is $500,000 in profit (that is, revenue minus expenses), which represents a significant amount in savings. To stay current on the latest corporation rates, please visit the CRA’s website (Corporation Taxes).

WHICH COMPANIES QUALIFY?

After seeing how much it can save you, I hope I have you interested in this special tax rate. Next, we are going to look at what varieties of Canadian companies qualify for the deduction.

In order to be eligible, your company must be a Canadian Controlled Private Corporation (CCPC). Not currently incorporated but thinking of doing so? Please visit our resource on the subject (Allan Madan’s Personal Tax Tips) to find out more. A CCPC has the following characteristics:

  •   Incorporated in Canada;
  •   More than 50% of the voting share capital of the corporation must be owned by Canadian residents;
  •   Is not listed on a stock exchange.

As the allowance is directed to smaller organizations, your company cannot have a capital size of over $15 million dollars. If your company has a taxable capital of $10 million and $15 million dollars in active income during the previous year, you are still eligible but your limit will be reduced. For more information on CCPC qualification, please visit TurboTax (do I qualify for a small business deduction?).

WHAT ARE THE TYPES OF INCOME THAT APPLY?

Now that you have determined you are a CCPC, the next matter is the types of income that qualify. The type of earnings your company earns must be Active Business Income in order to receive the SBD. This simply means income earned from a business excluding investment income and capital gains.

HOW DO I TAKE ADVANTAGE OF THIS TOOL?

Now you know what types of corporations and earnings qualify for the small business deduction, the final topic of discussion is how to fully take advantage of it. To do this, ask your accountant to prepare Corporate Income Tax Return and claim the small business tax rate on the return. If you would like to do this yourself, please visit our resource (How Can I Prepare an Income Tax return for my Corporation?) Should your corporation earn both investment and active business gains, a separate calculation must be performed on Federal Schedule 7 of the Corporate Income Tax Return to calculate the proper percentage.

Assuming that your corporation makes more than $500,000 in profit, the excess profit above that limit will be levied with a percentage of 26.5%. Therefore, it is best to declare a bonus payable to yourself to reduce the corporation’s profit to $500,000 or less. However, when making the bonus, be sure to pay it within 180 days of your corporation’s year end. If you do not, the bonus will not be tax deductible

GOING FURTHER WITH THE SBD

Maximizing your SBD savings can be almost as easy as a game of  tic-tac-toe!

If you are in a partnership, there is an additional way to make the most of your CCPC savings. Let us say that you are a couple that owns two CCPC’s. If you both own one of the companies with no co-ownership (meaning that you do not own shares in your partner’s company and vice-versa), you can allocate $500,000 to each company. If you and your partner own the two companies together, then you only get $500,000 to split between the companies. The Canada Revenue Agency does this to prevent people from owning multiple companies and unfairly receiving a reduction on all of them.

To further illustrate this concept, let’s look at an example. Jack and Dianne are married, and they own two CCPC’s. If Jack owns 100% of his corporation and Diane owns 100% of hers, then they both get to pay the lower rate on up to $500,000 dollars of their business’s active income. However, if Jack owns some of Dianne’s company and vice-versa, the Canada Revenue Agency only gives them $500,000 jointly to split between their companies. The following info-graphic illustrates the concept further.

Making the most of SBD

Another key issue facing business owners in Canada today is whether to pay themselves salary or dividends. Would you like to know more? Please visit our resource (Should I pay myself salary or dividends as a business owner?)

Another thing to consider when opening CCPC’s is the differences in provincial tax rates. Although the federal portion of the corporation tax remains the same throughout Canada, the provincial percentage is different for each province. In Alberta, a CCPC will have its limit taxed at a lower rate than in Ontario (14% vs. Ontario’s 15.5%). This will allow the Albertan CCPC to save more, because there are paying less tax. For a full list of provinces and their tax rates on corporations, please visit KPMG’s resource on federal and provincial tax rates.

About the Author – Allan Madan

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation . Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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About the author

is a Chartered Accountant, CPA and Tax Expert and enjoys working with business owners, individuals and entrepreneurs.

8 Responses to THE SMALL BUSINESS DEDUCTION IN CANADA

  1. John Snow says:

    Recently, I converted my profitable business from a partnership to a CCPC. Are there any other benefits I can now enjoy besides the SBD? Are there any ways I can minimize my personal taxes?

    • amadan says:

      Hello and thank you for your question.

      Besides the small business deduction that I spoke about in the article above, you can also take advantage of the Capital Gains Exemption. This an allowance for the first $750,000 of Capital Gains to be received without being taxed as regular income tax. This, in turn, encourages people to buy shares of your company.

      If you do not want to pay any personal tax, try to minimize the amount of funds you are taking out of the corporation. If you are taking more funds out than is need to run the business, you may be jeopardizing your ability to claim the exemption. For shares to qualify for the exemption, the corporation must have at least 90% of the market value of its assets invested to earn business income.

  2. El Rey Santiago says:

    Hi Allan, if I invest excess funds made by my corporation, will the investment income earned be taxed at the full rate or the small business deduction rate?

    • amadan says:

      Hello. If you invest the excess funds made by your corporation, any income earned will be taxed at the full corporate tax rate. This tax rate may be higher than the personal marginal tax rates of the shareholders. If so, you will want to increase shareholder income. This will prevent the lower tax bracket of these shareholders from being “wasted”. A shareholder’s income can be increased if the corporation pays them more dividends.

      No tax savings from the small business deduction applies because investment income is not considered to be “earned” from operating a business. Only “active business income” applies for the deduction.

      Regards, Allan Madan and Team

  3. Daniel Ryan Marsh says:

    Hello Allan,

    My company is a CCPC. What is the maximum allowable business limit if my company is associated with other corporations? We have more than $10 million in taxable capital employed in Canada. Also, how do I calculate the rate if my corporation tax year spans multiple years?

    • superAmin says:

      Daniel,

      Since your corporation is associated with others, you need to file the Schedule 23. Then, you assign a percentage of the business limit to each corporation. Since your corporation has more than $10 million of taxable capital employed in Canada, your corporation may have a reduced limit. If your corporation’s tax year covers months in two different calendar years, the rate is prorated based on the number of days in each calendar year.

      Regards,
      Allan Madan and Team

  4. Fionna says:

    My husband and I have two small businesses but we each own one business so that we can cash in on the small business deduction. We are looking to start an additional small business but are unsure whether we should have co-ownership or if one of us should fully own it. What is the best route to take if one of us did not surpass the $500,000 deduction limit but the other one did?

    • superAmin says:

      If the new business was split between the two of you then the $500,000 deduction limit would also be split between the two of you. As such, it wouldn’t do you much good to have co-ownership of the business. The person who has not surpassed the $500,000 deduction limit should take full ownership. Keep in mind that if one person has two or more CCPCs associated with one another in a taxation year, the small business deduction must be shared between the two.

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