Small Business Deduction
At a glance
- No Condition
- Open Date : November 14, 2019
- All industries
- Canada Revenue Agency
- Government of Canada
Overview
Eligibility criteria
Eligibility criteria for this grant include being a Canadian-controlled private corporation (CCPC), having adjusted aggregate investment income within certain limits, and meeting the business limit requirements.
- Being a Canadian-controlled private corporation
- Holding adjusted aggregate investment income within specified limits
- Meeting the business limit requirements
Who is eligible
To be eligible for the small business deduction (SBD) rules discussed in the information provided, a company must fulfill the following criteria: 1. Be a Canadian-controlled private corporation (CCPC) 2. Have income from an active business carried on in Canada 3. Meet the requirements for business limit determination 4. Comply with the passive income business limit reduction and other related rules If a company meets these criteria and falls within the scope of the SBD rules outlined in the context, it may be eligible to apply for the grant.
Eligible expenses
There are eligible expenses for this grant. Applicants can claim expenses related to active business carried out in Canada, excluding certain income and exceeding certain losses. Eligible expenses include:
- Income for the year from an active business carried on in Canada
- Taxable income for the year
- Business limit for the year
Evaluation & selection criteria
There are evaluation and selection criteria for this grant. The evaluation and selection criteria include:
- Calculation of the adjusted aggregate investment income of the corporation and any associated corporations
- Calculation of the passive income business limit reduction for the corporation
- Demonstration that passive investments were not transferred to related corporations to avoid the passive income business limit reduction
- Evidence of active assets and their use in the corporation's active business
- Avoidance of transactions aimed at deferring the application of the SBD rule changes
### Summary: Small business deduction (SBD) rules aim to reduce the corporate income tax for Canadian-controlled private corporations (CCPCs) based on their active business income. Budget 2018 introduced changes to phase out the business limit of CCPCs with passive income, affecting the calculation of the SBD. ### Detailed Explanation:
Small Business Deduction (SBD) Rules Overview:
The Small Business Deduction (SBD) is designed to lower the corporate income tax burden for Canadian-controlled private corporations (CCPCs) that operate active businesses in Canada. The SBD rate is applied to the lesser of the income derived from active business operations, taxable income, and the business limit for the year.
Business Limit Determination:
A CCPC's business limit is typically set at $500,000 for a taxation year, adjusted based on the number of days in the year. This limit is allocated among associated corporations and may be reduced if the combined taxable capital employed in Canada exceeds certain thresholds.
Proposed Changes to SBD Rules:
Budget 2018 introduced a phased-out approach to CCPCs' business limits if their adjusted aggregate investment income, combined with associated corporations, falls within a specified range ($50,000 to $150,000). The reduction in the business limit is based on a straight-line calculation, impacting the overall SBD availability.
Calculation of Passive Income Business Limit Reduction:
The passive income business limit reduction for a CCPC is calculated using a formula that considers the CCPC's business limit and the adjusted aggregate investment income of the CCPC and associated corporations. This reduction formula ensures that passive income levels influence the SBD eligibility.
Adjusted Aggregate Investment Income:
The adjusted aggregate investment income of a private corporation includes various income and deduction components, such as taxable capital gains, property income, exempt income, and certain losses. The calculation method ensures that only relevant investment income impacts the SBD.
Anti-Avoidance Measures:
To prevent CCPCs from circumventing the passive income business limit reduction, an anti-avoidance rule restricts actions like transferring passive investments to related corporations not associated with the CCPC. The rule aims to maintain the integrity of the SBD system and prevent abuse.
Effective Date and Compliance:
The changes to the SBD rules are effective for taxation years starting after 2018. CCPCs with taxation years bridging 2018 and 2019 due to specific events must adhere to the new rules. Compliance with the SBD regulations and anti-avoidance provisions is essential to meet CRA requirements. Overall, understanding the revised small business deduction rules, including the impact of passive income limits and anti-avoidance measures, is crucial for CCPCs to optimize their tax planning strategies and maintain compliance guidelines.