Tax Alert

Small business deduction: What the proposed expansion of eligibility means for your business

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If your business was previously restricted from claiming the small business deduction (SBD) because of your size—you may be in luck soon. With the release of Bill C-32’s draft legislation (first introduced in Budget 2022), eligibility for the SBD could be expanded, allowing more medium-sized Canadian-controlled private corporations (CCPCs) to qualify.

What is the SBD?

The SBD provides eligible small businesses with a reduced federal corporate tax rate of 9% on up to $500,000 of active business income (compared to the general federal corporate tax rate of 15%). This will allow small businesses to retain more after-tax dollars and the hope is they use that money to reinvest toward growing and creating jobs.

The $500,000 business limit must be shared among a group of associated CCPCs, and is gradually reduced when:

  • the aggregate taxable capital employed in Canada of the associated group of companies exceeds $10 million and is eliminated when the taxable capital exceeds $15 million; or
  • the total adjusted aggregate investment income (AAII) of the associated group of companies exceeds $50,000 and is eliminated when the total AAII reaches $150,000.

The calculation of taxable capital can be complex but is generally calculated as the total of the shareholder’s equity, surpluses, certain reserves, loans and advances to the corporation, less certain types of investments in other corporations.

What is the proposed change?

The proposed legislation increases the upper limit of taxable capital at which the SBD is fully ground down to $50 million, which is a significant increase from the current upper limit of $15 million.   

The table below compares the SBD amount and anticipated federal tax savings based on different levels of taxable capital under current law as compared to the proposed change:   

Prior year’ aggregate taxable capital ($)

Current SBD ($)

Proposed SBD ($)

Proposed federal tax savings ($)

10 million

500,000

500,000

0

12 million

300,000

475,000

10,500

15 million

-

437,500

26,250

20 million

-

375,000

22,500

30 million

-

250,000

15,000

40 million

-

125,000

7,500

50 million

-

-

-

The federal tax savings under these proposals will be lower as the prior taxation year’s aggregate taxable capital reaches $50 million.

When is the proposed change effective?

This change is proposed to apply to taxation years that begin on or after April 7, 2022. Therefore, for a CCPC with a calendar year end, the change would apply starting with its December 31, 2023 taxation year.

Takeaway

As of the date of this article, Bill C-32 has not received Royal Assent.

If enacted, this proposed change will allow more medium-sized CCPCs to be eligible for some portion of the SBD, thereby providing tax relief. However, there are currently no changes proposed to the reduction of the SBD based on the adjusted aggregate investment income criteria and therefore not all CCPCs may benefit, even if they fall within the increased taxable capital range.

If you need help navigating this change, contact your local advisor or reach out to us here.

Disclaimer

The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal, or tax advice, or an opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.

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