Transcript - Episode 7: Small business deduction – Is your business eligible?
Host: Hello and welcome to the Canada Revenue Agency’s payroll podcast. On today’s episode, I talk to Lise, a manager with the CRA, to take a look at the small business deduction. We’ll be discussing some of the eligibility requirements and explaining some important concepts you need to understand before claiming the deduction on your T2 - Corporation Income Tax Return.
The rules discussed in this series refer to the type of corporation that may be eligible to claim the small business deduction and the general type of income that may or may not allow a corporation to qualify.
It is important to note that the small business deduction is a broad topic. This podcast only covers some of the associated rules. Please refer to the available resources discussed in the series, including the Income Tax Act, for more information on the topic. So, with that being said, what is the small business deduction?
Lise: So, the small business deduction is a deduction that Canadian-controlled private corporations, or as we often refer to them, CCPCs, may be entitled to claim on active business income earned in Canada and its purpose is to help these businesses, or small businesses re-invest and grow.
Host: Okay, so, would any small business be eligible for the small business deduction, or how does that work exactly?
Lise: Well no, not all small businesses are eligible for the small business deduction. The business needs to be carried on by a corporation that is a CCPC throughout the year and then on top of that, there are several other conditions that must be considered.
So first of all, the income earned must be from an active business carried out in Canada, and not from a specified investment business or personal services business.
Host: Alright, so first, we’d be looking at the nature of the income the business is earning?
Lise: Yes, that’s right. But, if the business is otherwise described as a specified investment business or a personal services business, you need to employ more than five full-time employees throughout the year for the income to be considered from an active business.
Host: Okay so, we’d look at how many full-time employees the business has.
Lise: Exactly. Or, if you’re a specified investment business with an associated corporation that provides managerial, financial, administrative, maintenance, or any service along these lines to your corporation while carrying on an active business, and you would need to hire more than five full-time employees to do the work if your associated corporation didn’t.
Host: Alright, so you’ve named several conditions. If I understand correctly, we need to make sure that the business is carried on by a corporation that is a CCPC throughout the year, and once confirmed, then we look at other conditions, including the ones we’ve mentioned.
Lise: That’s correct.
Host: After the break, I’ll ask Lise to define the term “CCPC” and help us understand the more than five employee rule. Stay with us.
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Host: In order to claim the small business deduction, the business needs to be carried on by a corporation that is a CCPC throughout the year. Some of you may be wondering: What is a CCPC? I asked Lise to explain that term in more detail.
Lise: Generally speaking, it’s a special type of private corporation that is a Canadian corporation that can’t be directly or indirectly controlled by public corporations, non-residents, or any combination of the two, in any manner. In addition, corporations that have shares listed on a designated stock exchange, in or outside of Canada, don’t qualify as a CCPC.
Host: Okay, so it’s a very specific definition then. But other than having access to the small business deduction, are there any other benefits to being a Canadian-controlled private corporation?
Lise: It’s definitely an advantage for a corporation and its shareholders to qualify as a CCPC.
Other than access to the small business deduction, businesses also get an extra month to pay the balance of certain taxes payable for the year and they receive enhanced investment tax credits for expenses related to scientific research and experimental development. These are just a few of the many benefits available.
Host: When we discussed the eligibility criteria earlier, you mentioned that some corporations that may otherwise be ineligible for the small business deduction could actually be considered eligible if they have more than five full-time employees throughout the year. Could you shed some light on that?
Lise: Sure. A corporation whose principal purpose is to earn property income (like rent) is not eligible for the small business deduction unless it employs more than five full-time employees throughout that year. The small business deduction was implemented to help the creation of new jobs for economic growth.
The more than five employee requirement entails the corporation having employed more than five full-time employees in the business throughout the year or an associated corporation which provides the managerial, financial, administrative, maintenance or similar services that we mentioned before, to the corporation while carrying on an active business. The corporation would have to engage more than five full-time employees to perform these services if the associated corporation were not providing them.
Host: Thank you for listening to the CRA’s payroll podcast. Today’s episode was part one of a two-part series on the small business deduction. Part two of my conversation with Lise will focus on the difference between active business income and income from a specified investment business. If you have any questions about the show, if you’d like to give feedback, or if you’d like to request a topic for a future episode, you can email us at email@example.com. We’d love to hear from you.
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