Deduction
Dear Clients and Friends,
The 2022 Federal Budget proposed a favourable tax change for Canadian-Controlled Private Corporations (CCPCs) that were previously restricted from claiming the small business deduction (SBD) because they were too large.
What is the SBD?
The SBD reduces the corporate income taxes that a corporation would pay in a taxation year, by providing CCPC’s with a reduced tax rate on the first $500,000 of active business profits. Profits qualifying for the SBD are taxed at a federal tax rate of 9%, compared to the general rate on business profits from active businesses of 15%.
The $500,000 annual business limit can be claimed in a single corporation or shared amongst other CCPCs that are associated for income tax purposes.
What are the restrictions in claiming the SBD?
Canada Revenue Agency (CRA) enforces two main restrictions for CCPCs claiming the SBD. The first restriction is based on size, which is triggered when the taxable capital of a CCPC, together with the taxable capital of associated corporations, exceeds $10 million at the end of the previous taxation year. Taxable capital is generally defined as the sum of the carrying values of shareholders’ equity, surpluses, debt, and reserves, reduced by investments in shares and debt held in other companies.
The second restriction exists where certain investment income, within an associated group of corporations, exceeds $50,000 in the preceding taxation year. Under this provision, the small business limit will be reduced by $5 for every $1 of investment income that is above the $50,000 threshold. The deduction is fully eliminated when investment income for the preceding year reaches $150,000.
What has improved?
Previously, the SBD was reduced when taxable capital employed in Canada within the associated group exceeded $10 million and was fully eliminated when taxable capital reaches $15 million. The proposed change raises the upper limit of taxable capital from $15 million to $50 million, phasing out the SBD at $50 million in taxable capital and increasing the number of CCPCs eligible for the deduction. The increase is effective for tax years that start on or after April 7, 2022. For companies with a calendar year end, the change will be effective starting with the 2023 tax year.
No changes have been proposed to the investment income reduction of the SBD. As a result, not all taxpayers will be able to take advantage of the increased limit to phase out the SBD based on taxable capital.
Clearhouse LLP can assist in determining whether your corporation is eligible for the SBD and can benefit from the changes implemented.
Please do not hesitate to contact us at info@clearhouse.ca or (647) 969 7382 if you have any questions.
Kindest Regards,
Your Clearhouse LLP Team