SMALL BUSINESS DEDUCTION: Advantages of Incorporation
Contact Neufeld Legal for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
The Small Business Deduction (SBD) is a tax credit that allows eligible Canadian-controlled private corporations (CCPCs) to pay a significantly lower federal corporate income tax rate on their first portion of active business income. Instead of the general federal corporate tax rate (currently 15% after the general tax reduction), a qualifying CCPC pays a reduced federal tax rate of 9% on the income eligible for the SBD. Most provinces and territories also offer a corresponding lower small business tax rate on this income.
To qualify for the Small Business Deduction, the corporation must generally meet the following key criteria:
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The corporation must be a Canadian-Controlled Private Corporation (CCPC) throughout the tax year. This means it is:
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A private corporation.
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A Canadian corporation (federally or provincially incorported).
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Not controlled by non-residents or public corporations.
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The reduced rate applies to Active Business Income carried on in Canada. It generally does not apply to income from a specified investment business (like passive investment income) or a personal service business (an "incorporated employee").
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The SBD applies to the first $500,000 of qualifying active business income. This limit must be shared among any corporations that are "associated."
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The $500,000 business limit can be reduced (phased out) if the corporation (and any associated corporations) exceeds certain thresholds:
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Taxable Capital (size): The limit starts to phase out when combined taxable capital employed in Canada exceeds $10 million and is completely eliminated when it reaches $50 million (for tax years beginning on or after April 7, 2022).
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Passive Investment Income: The limit starts to phase out when adjusted aggregate investment income exceeds $50,000 and is completely eliminated when it reaches $150,000.
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The Small Business Deduction is a critical mechanism to support the growth of Canadian small and medium-sized enterprises by allowing them to retain more of their after-tax income for reinvestment. Yet, given the inherent legal complexities, especially with the phase-out rules, it's highly recommended to consult with a qualified tax professional (lawyers and accountants) to ensure your corporation is properly claiming the deduction and navigating the rules for associated corporations and passive income.
So if you are looking to incorporate a new corporation or deal with the corporate legalities impacting your company, contact our law firm to schedule a confidential consultation with a lawyer experienced in the legal intricacies of business incorporation and commercial business development at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.
