Small Business Deduction
The small business deduction provides Canadian Controlled Private Corporations with a tax break on their first $500,000 of active business income.
Canadian Controlled Private Corporations (CCPCs)
A CCPC is a private corporation which is controlled by resident Canadians.
Active Business Income
Subsection 125(7) of the Income Tax Act defines active business income to mean any business carried on by a corporation other than a specified investment business, or a personal services business and to include an adventure of concern in the nature of trade.
Subsection 248(1) of the Income Tax Act defines business as including a profession, calling, trade, manufacture, or undertaking of any kind whatsoever but does not include an office or employment.
Essentially, unless you are running a specified investment business, or a personal services business, your corporation is likely earning active business income, and again, likely qualifies for the small business deduction.
Specified Investment Business
A specified investment business is a business whose principal purpose is to gain income from property. Examples of this include:
- Dividends;
- Interest;
- Real Estate Rentals; and
- Royalties.
A very simple way to get around the above rule is by having five full time employees working for the corporation. If that were the case, then the business would not be able to be classified as a specified investment business.
If a business earns rental income, but also actively manages the property or properties in question, it can be difficult to know whether that business would be eligible for the small business deduction. There are Tax Court of Canada cases that both allow, and deny the small business deduction in this scenario.
Personal Services Business
Please see our article here.
If you have been denied the small business deduction, or do not know whether you qualify, give us a call today!
Case Law
Fautley v. The Queen, 2002 CanLii 896 – The Small Business Deduction and Allowable Business Investment Losses
Gill v. The Minister of National Revenue, 1998 CanLii 201 – Specified Investment Businesses and the Small Business Deduction
Irving Oil Ltd. v. The Queen, 2000 CanLii 93, Canada v. Irving Oil Ltd., 2001 FCA 364 – Definition of Active Business Income
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.
