Updated: December 16, 2022
If your business was previously restricted from claiming the small business deduction (SBD) because of your size—you may be in luck. Bill C-32 received Royal Assent on December 15, 2022, enacting legislation to allow more medium-sized Canadian-controlled private corporations (CCPCs) to qualify. Specifically, the new rule expands the eligibility criteria for the SBD.
This change applies to taxation years that begin on or after April 7, 2022. Therefore, for a CCPC with a calendar year end, the change will apply starting with its taxation year ending December 31, 2023.
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 allows 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. This limit is gradually reduced when the prior year’s aggregate taxable capital (which includes taxable capital of associated companies) exceeds $10 million and is fully eliminated once it reaches a certain threshold. The business limit is also reduced if the total adjusted aggregate investment income (AAII), including AAII of associated 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 has changed?
Under the new rule, the upper limit of aggregate taxable capital at which the SBD is fully eliminated increases to $50 million, which is a significant jump from the previous upper limit of $15 million.
The table below compares the SBD amount and anticipated federal tax savings based on different levels of taxable capital under the previous rule compared to the new rule:
|
Prior year’ aggregate taxable capital ($)
|
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 the new rule continues until it is gradually eliminated when the prior taxation year’s aggregate taxable capital reaches $50 million.
Takeaway
This change allows more medium-sized CCPCs to be eligible for some portion of the SBD to provide tax relief. However, there are currently no changes proposed to the reduction of the SBD based on the AAII 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.
