Small business owners in Canada are always looking for ways to save money and reduce their tax burden. One of the most significant tax deductions available to Canadian small businesses is the small business deduction (SBD). In this blog post, we will provide an overview of the SBD and explain everything you need to know to take advantage of it.
What is the Small Business Deduction (SBD)?
The SBD is a tax deduction that allows eligible Canadian small businesses to pay a lower tax rate on a portion of their business income. The deduction is applied to the first $500,000 of active business income, which is the amount of income a business earns from its operations, excluding investment income.
Eligibility for the SBD
To be eligible for the SBD, a Canadian business must meet the following criteria:
- Be a Canadian-controlled private corporation (CCPC)
- Have an active business in Canada
- Have taxable capital of less than $15 million
- Be owned by individuals who are Canadian residents
If a business meets all of these criteria, it is eligible to claim the SBD on its business income.
How the SBD Works
The SBD is a tax deduction that is applied to a CCPC’s business income at a rate of 9%. This means that a CCPC only pays a federal tax rate of 9% on the first $500,000 of its active business income. Provincial tax rates vary, but most provinces have a similar small business tax rate that is applied to the SBD.
For example, if a CCPC in Toronto has $500,000 of active business income, it would only pay $45,000 in federal tax, instead of the regular federal tax rate of 15%, which would be $75,000. The CCPC would also be eligible for a lower provincial tax rate, which could result in additional tax savings.
Limitations of the SBD
There are some limitations to the SBD that business owners should be aware of. First, the SBD cannot be applied to investment income, such as rental income or capital gains from the sale of investments. Second, if a business earns more than $50,000 of passive investment income in a year, its SBD limit will be reduced on a sliding scale.
Third, if a business is associated with another business, the associated businesses must share the $500,000 SBD limit. Associated businesses are businesses that are controlled by the same person or group of people, either directly or indirectly.
Finally, if a business has taxable capital of more than $10 million, its SBD limit will also be reduced on a sliding scale.
Conclusion
The small business deduction is an important tax deduction that can significantly reduce the tax burden for eligible Canadian small businesses. If you are a small business owner in Canada, it is important to understand the eligibility requirements and limitations of the SBD to take full advantage of this tax deduction. By taking advantage of the SBD, you can save money and reinvest those savings back into your business to fuel growth and success.