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Small Business Deduction Canada

How does the small business deduction help business owners in Canada save taxes?

If you are a business owner then it’s very important that you read this article, because I’ll show you how you can utilize the small business deduction to save a lot in taxes.


What is the Small Business Deduction in Canada?

The small business deduction is a tax credit available to corporations in Canada on active business income that reduces the general corporate tax rate for corporations from 32% to only 16.5%.

The first $500,000 in profit (that is, revenue minus expenses) is allowable for the small business deduction.

Types of Corporations That Qualify – Small Business Deduction Canada

Which types of businesses qualify for the small business deduction in Canada?

In order for a business to qualify for the small business deduction it must be a Canadian Controlled Private Corporation (CCPC). 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; and
  •   Is not listed on a stock exchange.

Types of Income that Qualify – Small Business Deduction Canada

What types of income qualify for the small business deduction in Canada?

The income earned your by your CCPC must be Active Business Income in order to receive the small business deduction in Canada. Active Business Income simply means income earned from a business. It excludes investment income and capital gains.

How do I Take Advantage of the Small Business Deduction in Canada?

Now that you know what types of corporations and income that qualify for the small business deduction in Canada, how do you take advantage of it?

To take advantage of the small business deduction, your accountant must prepare a Corporate Income Tax Return and claim the small business deduction on the return. For corporations that earn both investment and active business income, a separate calculation must be performed on Federal Schedule 7 of the Corporate Income Tax Return to calculate the small business deduction.

If your corporation has profits in excess of $500,000, then the excess profit will be taxed at a rate of 32%. Therefore, it’s better for your corporation to declare a bonus payable to you to reduce the profit of your corporation to $500,000. For the bonus to be tax deductible, it must be paid within 180 days of your corporation’s year end.

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.

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