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Chapter 4 - Page 4 of the T2 return
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- Small business deduction
Small business deduction
Corporations that were Canadian-controlled private corporations (CCPCs) throughout the tax year may be able to claim the small business deduction (SBD). The SBD reduces Part I tax that the corporation would otherwise have to pay.
The SBD rate is 17%. The SBD is calculated by multiplying the SBD rate by the least of the following amounts:
- the income from active business carried on in Canada (line 400);
- the taxable income (line 405);
- the business limit (line 410); or
- the reduced business limit (line 425).
The following section explains each of the above amounts.
Once you have calculated the SBD, enter it on line 430.
Line 400 - Income from active business carried on in Canada
Complete Schedule 7, Calculation of Aggregate Investment Income and Active Business Income, to determine the following amounts:
- the aggregate investment income and foreign investment income for determining the refundable portion of Part I tax (see Refundable portion of Part I tax, Lines 440, 445, and 450 for details);
- the specified partnership income for members of a partnership; and
- the income from an active business carried on in Canada for the SBD.
Note
If claiming a deduction for patronage dividends on line 416 of Schedule 1, complete Part 5 of Schedule 16 to establish active business income carried on in Canada.
Generally, active business income is income earned from a business source, including any income incidental to the business.
Income from a specified investment business or from a personal services business is generally not considered active business income and is not eligible for the SBD. The following sections explain when income from these types of businesses may be considered to be active business income and eligible for the SBD.
A specified investment business is a business with the principal purpose of deriving income from property, including interest, dividends, rents, or royalties. It also includes a business carried on by a prescribed labour-sponsored venture capital corporation, the principal purpose of which is to derive income from property.
Except for a prescribed labour-sponsored venture capital corporation, income from a specified investment business is considered to be active business income, and is therefore eligible for the SBD if:
- the corporation employs more than five full-time employees in the business throughout the year; or
- an associated corporation provides managerial, financial, administrative, maintenance, or other similar services to the corporation while carrying on an active business, and the corporation would have to engage more than five full-time employees to perform these services if the associated corporation were not providing them.
Note
The business a credit union carries on, or the business of leasing property other than real property, is not considered specified investment business.
A personal services business is a business that a corporation carries on to provide services to another entity (such as a person or a partnership) that an officer or employee of that entity would usually perform.
Instead, an individual performs the services on behalf of the corporation. That individual is called an incorporated employee.
Any income the corporation derives from providing the services is considered income from a personal services business, as long as both of the following conditions are met:
- the incorporated employee who is performing the services, or any person related to him or her, is a specified shareholder of the corporation; and
- the incorporated employee would, if it were not for the existence of the corporation, reasonably be considered an officer or employee of the entity receiving the services.
However, if the corporation employs more than five full-time employees throughout the year or provides the services to an associated corporation, the income is not considered to be from a personal services business. Therefore, the income is eligible for the SBD.
A specified shareholder is a taxpayer who owns, directly or indirectly at any time in the year, at least 10% of the issued shares of any class of capital stock of the corporation or a related corporation.
How to calculate income from an active business carried on in Canada
Generally, to calculate active business income from carrying on a business in Canada, you have to deduct from net income for income tax purposes any of the following amounts that apply:
- taxable capital gains minus allowable capital losses;
- dividends that are deductible from income under sections 112 and 113, and subsection 138(6);
- property income minus property losses;
- property income from an interest in a trust;
- foreign business income;
- income from a specified investment business; and
- income from a personal services business.
A corporation that is a member of a partnership has to complete Schedule 7 to calculate its active business income.
The corporate partnership rules impose a limit on the amount of active business income earned by a partnership that is eligible for the SBD. This amount is allocated among all partners.
Specified partnership income is the amount of partnership income eligible for the SBD that is allocated to the corporation. You have to add this income to your active business income.
If the partnership incurs a loss from carrying on an active business, you have to deduct the corporation's share of that loss from its active business income. This is referred to as a specified partnership loss.
If the corporation received a T5013 slip, Statement of Partnership Income, that shows its share of partnership income or loss, include this form with the return.
On line 400, enter the total active business income you calculated on Schedule 7.
References
Subsections 125(1), 125(7), and 248(1)
Section 251
IT-73, The Small Business Deduction
Line 405 - Taxable income for the SBD
The taxable income you use to calculate the SBD is usually the amount entered on line 360. However, if you have claimed a foreign non-business income tax credit, a foreign business income tax credit, or both, you have to reduce the taxable income by:
- ten thirds (10/3) of the amount that would be deductible as a federal foreign non-business income tax credit on line 632, if that credit was determined without the refundable tax on the CCPC's investment income (line 604) and without reference to the corporate tax reduction under section 123.4; and
- For tax years ending after October 31, 2011, the factor 10/3 is increased to 100/28 to adjust for foreign non business income following the elimination of the surtax that was imposed on corporations before 2008. The result of the multiplication by line 632 has to be pro-rated based on the number of days in the tax year that are in each period: before November 1, 2011, and after October 31, 2011.
- [1/(0.38 minus the general rate reduction percentage for the tax year)] times the amount that would be deductible as a federal foreign business income tax credit (line 636) if that credit was determined without reference to the corporate tax reduction under section 123.4. The general rate reduction percentage has to be prorated.
You also have to reduce taxable income by any amount that, because of federal law, is exempt from Part I tax.
On line 405, enter your taxable income for the purposes of calculating the SBD.
References
Paragraph 125(1)(b)
Subsection 126(7)
Line 410 - Business limit
The maximum allowable business limit for a corporation that is not associated with any other corporation is $500,000.
For tax years that straddle a calendar year, the rate is prorated based on the number of days in each calendar year.
CCPCs that are associated with one or more corporations during the tax year have to file Schedule 23, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Business Limit. On this schedule, a percentage of the business limit is allocated to each corporation, and the total of all percentages cannot be more than 100%.
On line 410, enter the business limit for the year. Enter the amount from Schedule 23 for an associated corporation.
Notes
If the tax year is shorter than 51 weeks, you have to prorate the business limit, based on the number of days in the tax year divided by 365, before you enter it on line 410.
If you elect not to be an associated corporation with two other corporations for the small business deduction, you have to file Schedule 28, Election not to be an Associated Corporation.
References
Subsections 125(2), 125(3), 125(5), and 256(2)
IT-64, Corporations: Association and Control
Line 425 - Reduced business limit
Large CCPCs that have taxable capital employed in Canada of $15 million or more do not qualify for the SBD. The business limit is reduced on a straight-line basis for CCPCs that have taxable capital employed in Canada of between $10 million and $15 million in the previous year. Similar restrictions apply to any CCPC that is a member of an associated group that has, in total, more than $10 million of taxable capital employed in Canada.
Use Schedule 23, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Business Limit, if you are an associated CCPC. For more information about this schedule, see Schedule 23.
Reference
Subsection 125(5.1)
Line 430 - Small business deduction
Multiply the least of lines 400, 405, 410, and 425 by the SBD rate for the year and enter it at line 430. This amount is also entered on line 1 of page 7 of the return. See the beginning of this chapter for the SBD rates.
