As a small business owner in Canada, you may be eligible to claim the Small Business Deduction (SBD), which can result in significant tax savings. However, to claim this deduction, you need to meet certain eligibility requirements. In this blog post, we’ll outline the eligibility requirements to claim the Small Business Deduction.
What is the Small Business Deduction?
The Small Business Deduction is a tax incentive offered by the Canadian government to small businesses. It allows eligible small businesses to deduct up to $500,000 of their business income from their taxable income. This can result in significant tax savings for small businesses.
Eligibility Requirements for Small Business Deduction
- Canadian Controlled Private Corporation (CCPC)
To be eligible for the SBD, your business needs to be a Canadian Controlled Private Corporation (CCPC). This means that the corporation needs to be incorporated in Canada and at least 50% of the voting shares need to be owned by Canadian residents.
- Active Business Income
To qualify for the SBD, your business needs to generate active business income. This means income generated from the regular operations of your business. Passive income, such as investment income or rental income, does not qualify for the SBD.
- Associated Companies
If you have multiple businesses, you need to ensure that they are not considered associated companies. Associated companies are two or more corporations that are controlled by the same group of individuals. If you have associated companies, you need to share the $500,000 SBD limit among all the companies.
- Taxable Capital
Your business also needs to meet certain taxable capital thresholds to qualify for the SBD. If your taxable capital exceeds $10 million, the SBD limit will be reduced on a sliding scale. If your taxable capital exceeds $15 million, you will not be eligible for the SBD.
- Active Business in Canada
Your business needs to be actively conducting business in Canada to qualify for the SBD. This means that your business needs to have a physical presence in Canada and perform its business activities in Canada.
- Shareholder’s Association
Finally, the Small Business Deduction also requires that shareholders must be dealing at arm’s length with the corporation to qualify for the deduction.
Conclusion
The Small Business Deduction is a valuable tax incentive for small businesses in Canada. By meeting the eligibility requirements, you can save significant amounts of money on your taxes. It’s important to work with an experienced tax professional to ensure that you meet all the requirements and maximize your tax savings.
At JTT Accounting, we offer expert tax and accounting services to small businesses in Toronto and Ontario. Contact us today to learn more about how we can help you with your small business tax needs.