The Small Business Deduction Business Limit in Canada
The Business Limit relates to income tax deductions available to Canadian corporations when filing Canadian corporate tax with the Canada Revenue Agency (CRA). The Business Limit is a set dollar amount that defines a cap on the amount of Small Business Deduction (SBD) a Canadian corporation may receive.
As of writing, the maximum allowable business limit is $500,000. The rate is prorated based on the number of days in each calendar year for tax years (fiscal years) that straddle a calendar year.
The Small Business Deduction reduces the Part I income tax that the corporation would otherwise have to pay, which is 38%. To receive the Small Business Deduction, a business has to be a Canadian-controlled Private Corporation (CCPC). For such corporations, the Small Business Deduction rate for 2019 is 19.0%, which is combined with a federal tax abatement of 10%, for a resulting small business tax rate of 9.0%.
How to Calculate the Small Business Deduction
The business limit is one of the factors used to determine how much of an SBD a CCPC is entitled to.
You would calculate the SBD by multiplying the SBD rate by the least of the following amounts:
- the income from active business carried on in Canada (line 400);
- the taxable income (line 405);
- the business limit (line 410); or
- the reduced business limit (line 425) (Chapter 4 of T4012: T2 Corporation - Income Tax Guide, Canada Revenue Agency).
Remember that if your corporate tax year straddles a calendar year (i.e. your corporation's tax year is less than 51 weeks), you must prorate the business limit by dividing the number of days in your corporation's tax year by 365 before you enter it on line 410.
Additionally, note that, according to the Canada Revenue Agency, CCPCs that are associated with one or more corporations during the tax year have to file Schedule 23, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Business Limit. On this schedule, a percentage of the business limit is allocated to each corporation, and the total of all percentages cannot be more than 100%. For more information about this schedule, see Schedule 23.
Qualifying for the Small Business Deduction
The reduced business limit in the explanation from the T2 Corporation Income Tax Guide above refers to the fact that since large Canadian-controlled Private Corporations (CCPCs) that have taxable capital employed in Canada of $15 million or more do not qualify for the Small Business Deduction, the business limit is reduced on a straight-line basis for CCPCs that have taxable capital employed in Canada of between $10 million and $15 million in the previous year.
Note that income refers to active business income. Income that does not qualify as active business income includes:
- Investment income
- Income from a specified investment business, which is a corporation that derives income from property in the form of rents, leases, royalties, etc., unless the business has more than five full-time employees.
- Income from a personal services business. A personal services business is a business that exists solely to provide services to another entity. The individual who performs the services is known as an incorporated employee. Relatives of the incorporated employee also qualify. The services provided would normally be performed by an employee or officer of the other entity. This type of arrangement (where all the business revenue typically comes from a single client) is closer to an employer/employee relationship than a business-to-business one. Being classified as a personal services business can be avoided if the business has more than five employees.
Provincial Small Business Deductions/Rates
The provinces and territories each have their own lowered tax rates for qualifying small businesses. The SBD limits are the same as the federal limits with a few exceptions:
|Small Business Limit||Rate %||Combined Fed/Prov. Rate%|
|Newfoundland and Labrador||$500,000||3.00||12.00|
|Prince Edward Island||$500,000||3.50||12.50|
*Manufacturing and Processing Profits Tax Credit