Tax is often a big challenge for business owners in Canada. In between all the complexities, the small business deduction stands out as a beacon of hope. Qualifying entities can reduce their federal corporate tax rate from 15% to 9%, on up to $500,000 of their active business profits.
But what exactly is the small business deduction and how can your business make the most of it? Let’s find out.
What is the small business deduction?
At its core, the small business deduction is a tax relief mechanism aimed to bolster Canadian businesses. It significantly reduces the Part I tax that a corporation might otherwise owe.
While the term “small” is in its name, it’s important to understand that this doesn’t strictly pertain to the size of your enterprise. The focus is more on Canadian-Controlled Private Corporations (CCPCs) and the nature of their active business income.
Why does this deduction exist?
The government came up with the small business deduction to help Canadian businesses flourish and innovate. By reducing tax burdens, it provides an environment where businesses hold onto profits, reinvest them into their businesses, and contribute more significantly to the economy.
A brief history of the small business deduction in Canada
The small business tax deduction has its roots in the 1972 Canadian tax reform. Before this reform, all corporations, regardless of size, were taxed at the same rate.
After recognizing the unique challenges faced by small businesses, the government introduced the small business deduction to level the playing field.
Over time, the small business deduction has had its fair share of tweaks. Whether it’s changing the income cap or adjusting the rate, these shifts show how the economy has changed and how the government is committed to supporting small businesses.
Small business deduction eligibility in Canada
To tap into the benefits of the small business deduction in Canada, a corporation must meet certain criteria:
Canadian-Controlled Private Corporation (CCPC) status
Your business must be privately owned. A CCPC is a corporation that’s not under the control of non-residents or public corporations. It’s a private entity, predominantly under Canadian ownership.
Less than $10 million in taxable capital
Your organization must have less than ten million dollars in taxable capital employed in Canada in order to claim the full deduction. The deduction is still available if the taxable capital exceeds $10 million, but at a reducing rate, until the cap of $50 million is reached, beyond which no deduction is available.
Associated corporations
If your business has connections with other companies, you might have to share the small business deduction. This rule exists to prevent big companies from breaking into smaller ones just to get this tax benefit.
Provincial variations in small business deduction
Depending on the territory or province your business is located in, you may be able to enjoy an even lower tax rate. In Ontario, for example, the small business deduction reduces the effective tax rate to 3.2% on the first $500,000 of active business income.
The table below shows the small business tax rate on the first $500,000 / Business limit threshold.
| 2023 Small Business Tax Rate (CCPC) | |
| Federal | 9% |
| Ontario | 3.20% |
| British Columbia | 2% |
| Alberta | 2% |
| Manitoba | 0% |
| New Brunswick | 2.50% |
| Prince Edward Island | 1% |
| Nova Scotia | 2.50% |
| Newfoundland & Labrador | 3% |
| Nunavut | 3% |
| Northwest Territories | 2% |
| Yukon | 0% |
| Saskatchewan | 0% |
| Quebec | 3.20% |
Benefits of the small business deduction for businesses
Some of the benefits of this deduction include:
Savings: The immediate and most tangible benefit is the significant tax savings, which is available to be reinvested into your business.
Growth: With more capital at hand, your business can explore growth options, be it launching a new product, expanding operations, or hiring talent.
Entrepreneurship: By offering this tax relief, the Canadian government is making it easier for budding entrepreneurs to start a business, support themselves and contribute to the economy.
Common misconception
A prevalent misconception is that this deduction is solely for “small” businesses. The emphasis is on the type of corporation and its income, not its size. The deduction is still available to those that exceed the business limit threshold but at a reduced rate.
How online bookkeeping can help
To sum up, accurate financial records are the backbone of any successful tax strategy. Online bookkeeping services ensure that your finances are meticulously looked after and your records are accurate and up to date.
If you’re in need of quality bookkeeping services, schedule a complimentary consultation with our team today to discuss our services.
