Five facts you need to know about the small business deduction
The small business deduction (SBD) in Canada is a tax benefit designed to support small businesses by providing a reduced corporate income tax rate on a portion of their active business income. The SBD is a way to encourage the growth and development of small businesses, allowing them to retain more of their income for reinvestment, expansion, and job creation.
As of my last knowledge update in January 2022, the small business deduction rules in Canada were as follows:
Applicability: The SBD is available to Canadian-controlled private corporations (CCPCs) that meet certain criteria. To qualify, a corporation must be a CCPC throughout the tax year and must carry on an active business in Canada.
Annual Limit: The SBD limits the amount of income eligible for the reduced tax rate. The federal SBD limit is applied on a yearly basis. Provincial or territorial limits may also apply, and they can vary.
Federal Small Business Tax Rate: The federal small business tax rate is lower than the general corporate tax rate. The eligible income for the SBD is taxed at this reduced rate. The rate can be subject to change, so it's essential to refer to the most recent tax regulations or consult with a tax professional for the latest information.
Eligible Income: The SBD generally applies to "active business income," which includes income earned from a business carried on in Canada, excluding certain types of income such as investment income.
Grind and Reductions: There are certain rules in place to prevent the multiplication of access to the SBD among associated corporations. These rules, often referred to as "grind" and "grind-down" rules, may reduce the amount of the SBD available to a corporation.
It's crucial to note that tax laws and regulations are subject to change, and updates may have occurred since my last knowledge update in January 2022. Therefore, it's advisable to consult with a professional tax advisor or refer to the latest information from the Canada Revenue Agency (CRA) for the most current details regarding the small business deduction and other tax-related matters.