If you run a Canadian-owned corporation, the small business deduction is one of the most beneficial income tax deductions available to your company. This deduction reduces the amount of Part 1 tax your company needs to pay.
Benefits of the Small Business Deduction
If your company qualifies for the small business deduction, you pay a lower rate of income tax. The rates change by province. The Canada Revenue Agency (CRA) publishes a chart that shows the lower and higher rates of corporate tax for each province or territory (except for Alberta and Quebec, which don’t have corporation tax collection agreements with the CRA).
Imagine you run a company in Ontario. According to the tax rates in effect as of January 1st, your income tax rate is 4.5%, compared to non-qualifying companies in your province, which pay tax at a rate of 11.5%.
Does Your Company Qualify for the Small Business Deduction?
To qualify for the small business deduction, your company must be a Canadian-controlled private corporation (CCPC). To be a CCPC, your company needs to meet all of the following conditions, according to Chapter 1 of the T4012 – T2 Corporation Income Tax Guide:
- It’s a private corporation
- It was resident in Canada and was either incorporated in Canada or resident in Canada between June 18, 1971 and the end of the most recent tax year
- 100% of your capital stock shares are not listed on a designated stock exchange
In addition, to qualify for the small business deduction, your small business cannot be controlled directly or indirectly by:
- One or more non-resident people
- One or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700)
- A Canadian resident corporation that lists its shares on a designated stock exchange outside Canada
- Any combination of persons or corporations listed above
If your company fails to meet any one of the above criteria, then you cannot claim CCPC status.
Are There Limits for Taxable Capital Size on the Small Business Deduction?
The small business deduction in Canada also comes with taxable capital limits. If your business qualifies as a CCPC, and you have taxable capital of $15 million or more, you don’t qualify for the deduction.
If your CCPC’s taxable capital is between $10 million and $15 million in the previous tax year, you may be eligible for the small business deduction. However, your business limit is reduced on a straight-line basis.
Is your CCPC a member of an associated group? If the group’s taxable capital employed in Canada is more than $10 million, you’re also subject to a reduced business limit.
Qualifying as a CCPC is the best possible income tax scenario for your Canadian small business. The small business deduction is just one of the income tax advantages your CCPC can enjoy. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.