Small Business Deduction (SBD)

Neufeld Legal PC: Chris@NeufeldLegal.com - 403-400-4092 / 905-616-8864

The Small Business Deduction (SBD) is one of the most significant tax incentives for incorporated businesses in Canada. The SBD allows eligible Canadian corporations (provincially or federally incorporated) to pay a much lower federal corporate tax rate on a portion of their active business income.

The Small Business Deduction effectively reduces the corporate income tax rate for qualifying businesses on eligible income to 9% (compared to the general federal corporate tax rate of 15%); with provincial and territorial governments also offering reduced small business rates. This reduced rate applies to the first $500,000 of active business income in a tax year (the "business limit").

The Small Business Deduction is technically a tax credit (a deduction against tax payable), even though it is commonly referred to as a deduction. To be eligible for the SBD, a corporation must be a Canadian-Controlled Private Corporation (CCPC) throughout the tax year and must be earning active business income in Canada [more on CCPCs]. The income must come from an active business carried on in Canada, such that the deduction is not available for income from a Specified Investment Business (primarily earning income from property like rent, interest, or dividends, unless it employs more than five full-time employees) or a Personal Service Business (where an individual is essentially an incorporated employee). Furthermore, the annual $500,000 business limit can be reduced (or "phased out") in a few key scenarios:

• Taxable Capital: Based on the combined taxable capital employed in Canada of the CCPC and its associated corporations in the preceding tax year - the limit is reduced if taxable capital is between $10 million and $50 million, and it is fully eliminated at $50 million or more.

• Passive Income: Based on the total adjusted aggregate investment income (passive income) of the CCPC and its associated corporations in the preceding tax year - the limit is reduced if passive income is between $50,000 and $150,000, and it is fully eliminated at $150,000 or more.

• Associated Corporations: If a CCPC is part of a group of associated corporations (through common ownership or control), the $500,000 business limit must be shared among all of them.

The Small Business Deduction is a significant benefit designed to help small to medium-sized incorporated Canadian businesses. If you own an incorporated business, understanding the CCPC rules, your active business income, and potential business limit reductions is crucial for tax planning.

For knowledgeable and experienced tax law representation for corporate tax planning strategies, as your business enterprise strives to optimize the financial advantages of legal tax structuring, contact tax lawyer Christopher R. Neufeld at Chris@NeufeldLegal.com or call 403-400-4092 (Calgary, Alberta) / 905-616-8864 (Toronto, Ontario).

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