What is the Small Business Deduction and How can you avail of it?

Cutting through the tax and saving money is a wonderful idea when you run your own business, but it is a hassle to execute. Why? Because, like all tax systems around the world, it can be confusing.

Small Business Deduction is one of the best ways you can save tax. What is small business deduction? A reduced rate of tax is available on active business income of the corporation’s business limit of the year. Small business income tax rate is determined by subtracting the federal tax abatement and the small business tax deduction. So, overall, your business gets a reduced tax rate of 9-10%.

Do you Qualify for it?

Not all businesses can qualify for small business deduction. Canadian controlled private corporations or CCPCs qualify for small business deduction. How do you qualify for CCPC? There are certain conditions that have to be met according to Chapter 1 of the T4012 – T2 Corporation Income Tax Guide, which are:

• it is a private corporation;
• it is a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year;
• it is not controlled directly or indirectly by one or more non-resident persons;
• it is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
• it is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada;
• it is not controlled directly or indirectly by any combination of persons described in the three previous conditions;
• if all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange, were owned by one person, that person would not own sufficient shares to control the corporation; and
• no class of its shares of capital stock is listed on a designated stock exchange.

Other qualification criteria:

- There is a size limit based on a CCPC’s taxable income. Taxable capital of and beyond $15 million does not qualify.

- Your business should have had taxable capital between $10-15 million in the last year.

- CCPCs that are members of an associated group which has more than $10 million of taxable capital, in total, faces a reduced business limit.

Apply for Small Business Deduction

You apply when you file your taxes. Here are things you have to mention on the T2 Corporate Tax Return Form.

- Income from active business (line 400)
- Its taxable income (line 405)
- The business limit (line 410)
- The reduced business limit (line 425)

Ensure each of these is filled out thoroughly.

If you are a small business with such a large turnover, you should avail of Small Business Deduction. In need of more assistance? Get in touch with an accountant.