Canadian Small Business Deduction
At AG Tax, we often have our corporate clients inquiring about deductions or credits which they could rely on to save taxes. Although there are many useful credits and deductions, one deduction worth mentioning is the small business deduction, on which our tax analysts have prepared this article which could be informative to many Canadian corporate taxpayers. Nonetheless, it is always beneficial to consult a tax professional since no two situations are the same, and a tax recommendation that works for one taxpayer, may not be the best recommendation for another taxpayer.
What is the Small Business Deduction?
With the help of the Canada Revenue Agency’s (CRA) small business deduction Canadian-controlled private corporations (CCPCs) are subject to an 11% federal tax rate on active business income, depending on the level of income (currently the limit is CAD$500,000); which would otherwise be between 15% to 28%.
Some provinces also provide the small business deduction, however the low tax rates, and qualifying income limits vary from province to province.
For Example: A corporate earns $750,000 in a tax year; by using the small business deduction, the corporate will pay federal taxes at a rate of 11% on $500,000, and the remaining amount of $250,000 will be taxed at 15%.
Who Qualifies?
Only Canadian controlled private corporations (CCPC) can claim this deduction on their active business income.
What is a CCPC?
CCPC is a private corporation that is incorporated in Canada (Canadian resident) with absolutely no direct/indirect foreign control or public corporation, or listed on a foreign or any stock exchange.
What is considered as active business?
Active business includes any business/trade income other than income from property, such as: rent and royalties, etc.; or a corporate that provides personal services, or has less than 6 full-time employees.
That being said, corporations providing personal services are subject to the highest tax rate of 28%, and qualify for deductions only on income and benefits for the incorporated employee.
Large corporations may also qualify for the small business deduction, provided the corporation is a CCPC with a taxable capital (includes retained earnings, long-term debt, etc.) between $10 million to $15 million, and nothing more.
AG TAX LLP Can Help
Tax situations can be complicated, and complying with the tax regulations may be further stressful especially if there are possibilities of penalties for non-compliance.
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
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Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
