Following on from the Corporate Tax Example which briefly mentioned the Small Business Deduction concept, this article will cover a high-level overview of what it entails.
As a business owner in Canada, understanding the available tax benefits and deductions can potentially lower your tax bill. One such tax credit is the Small Business Deduction [SBD].
The SBD is a tax benefit available to Canadian-controlled private corporations (CCPCs) in Canada. The SBD effectively reduces the tax rate on the first $500,000 of corporate profits because it is taxed at a lower rate vs the normal corporate tax rate of 38%.
The Canadian Government designed the SBD as a means to encourage the growth of small companies into large enterprises over time. The idea was that small companies would keep reinvesting their saved profits back into growing their business.
According to Industry Canada, they define a small business as an entity that has between 1 and 100 employees. However, in order to qualify for the SBD, CRA uses different criteria that need to be met. The common requirements would usually be :
1] Must have active business income from the sale of goods and services
In layperson’s terms, income derived from investments such as interest, dividends and royalties must be excluded from the SBD rate in your tax computation.
2] Must be a Canadian controlled private corporation [CCPC]
To be regarded as a CCPC, the company :
a) Must be private. Its shares must not be listed on a stock exchange.
b) The corporation must be incorporated and resident in Canada.
c) It cannot be controlled (i.e. more than 50%) by a non-resident, public corporation
or any combination thereof.
3] Must have taxable capital that is less than $10 million
In simple language, the sum of the corporation’s total equity and loan advances in the balance sheet must be less than $10 million.
