The Small Business Deduction is one of the most beneficial of all income tax deductions available to Canadian corporations because it reduces the amount of Part 1 tax that a corporation would have to pay otherwise.
For instance, according to the tax rates in effect as of January 1st, a corporation that qualified for the Small Business Deduction would pay income tax at the rate of 4.5% in Ontario, while corporations of other types in the same province would pay tax at a rate of 11.5%.
See this chart from the Canada Revenue Agency to see the lower and higher rates of corporate tax for the province or territory where your corporation is headquartered (except for Alberta and Quebec which do not have corporation tax collection agreements with the CRA).
However, “Canadian corporation” doesn’t mean any corporation operating in Canada. To qualify for the Small Business Deduction, a corporation has to be a Canadian-controlled private corporation (CCPC).
To be classed as a Canadian-controlled private corporation, all of the following conditions have to be met according to Chapter 1 of the T4012 – T2 Corporation Income Tax Guide:
- it is a private corporation;
- it is a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year;
- it is not controlled directly or indirectly by one or more non-resident persons;
- it is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
- it is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada;
- it is not controlled directly or indirectly by any combination of persons described in the three previous conditions;
- if all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange, were owned by one person, that person would not own sufficient shares to control the corporation; and
- no class of its shares of capital stock is listed on a designated stock exchange.
There is also a size limit based on a Canadian-controlled private corporation’s taxable capital.
CCPCs that have taxable capital employed in Canada of $15 million or more do not qualify for the Small Business Deduction at all.
CCPCs that have taxable capital of between $10 million and $15 million in the previous tax year are eligible for the Small Business Deduction but their business limit is reduced on a straight-line basis.
And any CCPC that is a member of an associated group that has in total more than $10 million of taxable capital employed in Canada faces a reduced business limit as well.
Qualifying as a Canadian-controlled private corporation is the best possible income tax scenario for a Canadian corporation. The Small Business Deduction is just one of the income tax advantages such corporations enjoy.