Proposed changes to the Small Business Deduction from the recent Budget
Monday, June 13, 2016
Proposed changes to the Small Business Deduction from the recent budget:
What is the Small Business Deduction “SBD”?
The Small Business Deduction provides a reduced rate of tax on the first $500,000 of active business income for any Canadian Controlled Private Corporation “CCPC” in Canada.
What changes are proposed?
The proposed changes in the recent federal budget could have a substantial impact on the availability of the SBD for many CCPC’s that are controlled, partially controlled, or even nominally invested in by related family members that also have their own CCPC’s. The changes are proposed to apply to taxation years beginning on or after March 22, 2016.
Essentially the proposed changes will be referring to Specified Corporate Income “SCI” to determine if income received from another CCPC will be eligible for the SBD. If revenue your CCPC received from another CCPC (that is owned even nominally by a related family member) is more than 9.9% of your total gross revenue it will no longer be allowed to be applied to the SBD. In the past it would be subject to the SBD and therefore a lower rate of tax would be applied.
How does this affect the business owner?
As you can see above, in corporate structures with multiple CCPC’s involved and ownership through related parties, the allocation of income between CCPC’s will become more complex. In situations where related individuals currently hold different CCPC’s that provide services to each other there is a potentially significant tax impact if those services are considered SCI and no longer eligible for the SBD. In short, the proposed changes will make the availability of the SBD more restrictive and could cause additional tax within your company.
The changes noted above are complex and will have different outcomes for each company’s situation. We would be happy to discuss how these changes could affect your business or any other concerns you may have.