Glossary -> Small Business -> Small Business Deduction
Small Business Deduction
Income Tax Act (ITA) s. 125
The small business deduction is a reduction in corporate taxes for Canadian controlled private corporations, or CCPCs. The reduced rate of tax is available on active business income up to the corporation's business limit for the year. The federal business limit is $500,000 for 2009 and later years. The Federal 2016 Budget made changes regarding partnerships and corporate structures which have the effect of multiplying the amount of the small business deduction. See Small Business Taxation on the 2016 Budget website. These changes were included in Bill C-29, which received Royal Assent December 16, 2016.
The Video Tax News team has prepared a video outlining how the proposed changes to the small business deduction are much more complicated and affect many more businesses than anyone anticipated. If you are the owner of a small business which takes advantage of the small business deduction, it's important for you to learn more. See also the Canadian Tax Foundation Joint Committee June 2017 submission on the Small Business Deduction Rules (pdf).
The small business corporate income tax rate is determined by subtracting the federal tax abatement and the small business deduction from the Part I tax.
On October 24, 2017, in conjunction with their Fall Economic Statement, the Department of Finance tabled a Notice of Ways and Means Motion to revise the small business deduction for 2018/19 as per the following table, and to revise the gross-up rate and dividend tax credit rate for non-eligible dividends.
For taxation years beginning after 2018, the reduction of the corporation's business limit will be equal to the greater of:
(a) the reduction based on taxable capital, and
(b) the reduction based on aggregate investment income.
Eligibility for the small business deduction also depends on the amount of the corporation's taxable capital employed in Canada. When the taxable capital employed in Canada exceeds $10 million, the business limit of $500,000 is reduced, and is eliminated when taxable capital reaches $15 million ($50 million for tax years that begin on or after the 2022 Federal Budget date of April 7, 2022).
The formula to calculate the business limit reduction for tax years that start prior to April 7, 2022 is:
$500,000 x 0.225% x (taxable capital - $10 million) / 11,250
For a CCPC which is not sharing the $500,000 business limit with any association corporations, then the reduced business limits in the following table would apply, based on taxable capital employed in Canada, for tax years that start prior to April 7, 2022.
The 2018 federal budget brought in, for taxation years beginning after 2018, the reduction of the business limit when investment income earned by a CCPC exceeds $50,000. The formula to calculate the business limit reduction is:
5 x (aggregate investment income - $50,000)
The business limit is reduced to zero when aggregate investment income reaches $150,000. These proposals apply to taxation years beginning after 2018.
For a CCPC with taxable capital employed in Canada of $10 million or less, which is not sharing the business limit with any associated corporations, then the reduced business limits in the following table will apply, based on aggregate investment income.
Corporations with active business income less than their reduced business limit will not be affected by this change.
Some provinces, including Ontario and New Brunswick, are maintaining the current rules for the Small Business Corporate Income Tax Rate rather than implementing the federal passive income tax measure.
In 2016 Canada Revenue Agency issued Technical Interpretation 2016-0647271E5 Campgrounds and the Small Business Deduction, indicating that a corporation operating a campground would probably be considered to be earning property income, and would be considered a specified investment business unless it met the 5 full-time employees condition.
A 2019 Tax Court decision, 1717398 Ontario Inc. (Lost Forest Park) v. The Queen, 2019 TCC 183, dismissed the appeal of a corporation operating a campground.
Corporate tax rates - federal and provincial, general and small business
Canada Revenue Agency (CRA) Resources
IT-73R6 The Small Business Deduction (Archived)
T2 Corporation Income Tax Guide (T4012) - search for Small business deduction in the T4012 Guide
Revised: May 08, 2022
Copyright © 2002 Boat Harbour Investments Ltd. All Rights Reserved. See Reproduction of information from TaxTips.ca