Under the Income Tax Act of Canada, small business Corporations must share the Small Business Deduction if they are either Associated (these are known as the Association Rules), or if not Associated, a corporation receives income from another Corporation in which it or a shareholder of that corporation, owns shares of that payor corporation (these are known as the Specified Corporate Income (SCI) Rules).
The Small Business Deduction for a corporation means that the first $500,000 of Active Business Income is taxed at a much lower rate. This encourages the corporation to have more after-tax income in order to expand and grow its business. However, if the $500,000 limit has to be shared amongst certain corporations, this tax benefit is reduced.
These Rules to limit the Small Business Deduction are extremely complex, but in essence they are designed to limit the Small Business Deduction in situations where corporations are under common control or where a payor corporation pays a related corporation for services. In the past, complex corporate structures were put in place to multiply the $500,000 Limit. These situations are now in jeopardy.
Given the complexity and the punitive nature of these Rules, taxpayers should consult with their tax accountant, preferably one that has a CPA (Chartered Professional Accountant) or CA (Chartered Accountant) designation to ensure the corporate structures and business practices are in-line of these Rules. Our CPA – CA accounting firm based in Edmonton are highly experienced in income tax matters and would be pleased to assist in your personal or business tax matters.
ROMANOVSKY & ASSOCIATES LLP
CHARTERED PROFESSIONAL ACCOUNTANTS
Keith M.J. Anderson* BCom, CPA, CA-IT, CITP
Chartered Professional Accountant and Chartered Accountant (Canada)
CA-Designated Information Technology Specialist (Canada)
Certified Information Technology Professional (US)
* Professional Corporation