Canada’s Bill C-29 has been passed. There will be big effects for those who use the Small Business Deduction. In my last blog, the Small Business Deduction was defined: basically 17% lower tax rate for the first $500,000 of active business income. In this blog I will discuss what companies can use the Small Business Deduction. In future blogs I will discuss the changes Bill C-29 will make and the outcome for Small Businesses.
The main users of the Small Business Deduction are Canadian-Controlled Private Corporations (CCPCs). Obviously, the name implies the corporations must be ‘controlled’ by Canadians. Majority control by foreign shareholders makes the corporation ineligible to use the Small Business Deduction. Another way to think about it is that the controlling majority of the company have to be a resident of Canada. So, a company that operates in Canada but is controlled by a trustee in a foreign land would be ineligible. For example, perhaps two parents die and the remaining shareholder is a minor. The company becomes controlled by a trustee, perhaps an American uncle, until the minor becomes of age. As the uncle is in control (as the trustee), and in another country, the corporation would not be ‘Canadian controlled’ and therefore not a CCPC.
Another consideration is the size of the company. The idea behind the Small Business Deduction is to help businesses grow. When the company becomes big, the SBD isn’t needed as much. Once a company reaches $10 million in taxable capital, the Small Business Deduction begins to be phased out. Once a business reaches $15 million in taxable capital, the Small Business Deduction is totally phased out. So, once a business reaches $500,000 in income or $10 million in taxable capital, the Deduction isn’t needed as much anymore.
In my next blog, I will outline the changes to the Small Business Deduction through Bill C-29. Then in the last blog in the series, I will discuss the impact of C-29 on small businesses.