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An Overview of the Small Business Deductions

January 13th. 2016

What is it?

The Small Business Deduction (SBD) is a deduction generally available to corporations in order to help reduce their taxes payable on their Active Business Income (ABI). Basically, the SBD serves as a way for small businesses to enjoy a reduced effective tax rate as they grow their operations. In the coming years, the SBD rate is expected to decrease.


ABI is generally defined as any business activity excluding income derived from property (such as rental, investment income, and royalties) or a “personal services business”.


How much is it and who gets it?


In Ontario, the 2016 combined general provincial and federal tax rate without the SBD is 26% (2015 - 26.5%).  If the corporation qualifies for the SBD they are eligible for a tax rate of 15% (2015 - 15.5%) on their first $500,000 of taxable income.


In order to qualify for the SBD, you must be a Canadian-controlled private corporation (CCPC). Some of the qualifications include:


1) The corporation is privately held and not publicly traded;

2) The corporation is a resident in Canada and was incorporated in Canada;

3) The corporation is not controlled directly or indirectly by one or more non-resident persons      or public corporations.


If the company is a member of an associated group, the $500,000 must be shared amongst the members (at the taxpayer’s discretion, ex. One corp. could have it all or can divide it up in any manner).


Taxable capital and the effect on small business deduction


The SBD could be restricted based on a company’s taxable capital.  In simple terms, taxable capital is the sum of the corporation’s retained earnings, share capital, and loans payable by the corporation less investments and loans receivable.  If the CCPC’s taxable capital employed in Canada, in the previous year, meets or exceeds $15 million, the corporation loses their ability to claim the SBD. If their taxable capital employed in Canada is between $10 and $15 million in the previous tax year, the amount eligible for the SBD is reduced.  These calculations are on an associated basis.  Therefore, it is necessary to look at all associated companies in a group when doing this test and not company by company.



The SBD is a very useful deduction available for business as they start and grow in Canada but there are restrictions and rules that the taxpayer must be aware of to ensure they qualify.

Please contact S+C Partners LLP for advice on how to attain or maintain your SBD status for your corporation.




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