As a business owner, it is essential to understand the tax laws and regulations that apply to your business. One of the most critical aspects of Canadian tax law is the definition of a specified investment business (SIB).

A specified investment business is a type of business that earns passive income from investments rather than from operating a business. If your business meets the criteria for a specified investment business, it may be subject to different tax rules and higher tax rates. Here is everything you need to know about the specified investment business definition.

What is a Specified Investment Business?

According to the Canada Revenue Agency (CRA), a specified investment business is a business that earns income primarily from property investments or earns income from property investments and other related businesses. The CRA has provided guidelines to help determine whether a business meets the definition of a specified investment business.

To meet the definition of an SIB, the following criteria must apply:

• The business earns more than 50% of its gross revenue from property investments, such as stocks, bonds, and rental properties.
• The business earns more than 10% of its gross revenue from property investments and is related to another business that also earns more than 50% of its gross revenue from property investments.

If a business meets either of these criteria, it will be considered a specified investment business.

How does being a Specified Investment Business Affect Taxes?

If a business meets the definition of a specified investment business, it may be subject to higher tax rates. For example, the small business deduction may not be available to a specified investment business. The small business deduction is a tax break that allows small businesses to pay a lower rate of tax on the first $500,000 of active business income.

A specified investment business may also be subject to the refundable dividend tax on hand (RDTOH) rules. RDTOH is a tax that is paid by corporations when they receive dividends from another corporation. If a specified investment business earns passive income, it may have to pay RDTOH on the dividends it receives.

Additionally, a specified investment business may not be able to claim certain deductions or credits that are available to active businesses. For example, a specified investment business may not be able to claim the scientific research and experimental development (SR&ED) tax credit.

Conclusion

In conclusion, as a business owner, it is important to understand the criteria for a specified investment business and how it can affect your taxes. If you are unsure whether your business meets the definition of an SIB, you should consult with a tax professional to ensure that you are complying with all tax laws and regulations.

Remember, failing to comply with tax laws can result in significant penalties and fines. Therefore, it is always better to be proactive and ensure that your business is operating within the law.