T2 Corporation – Income Tax Guide – Chapter 4: Page 4 of the T2 return

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Small business deduction

Corporations that were Canadian-controlled private corporations (CCPCs) throughout the tax year may be able to claim the small business deduction (SBD). The SBD reduces Part I tax that the corporation would otherwise have to pay.

The SBD is 19% of whichever of the following amounts is less:

The basic rate of Part I tax being 38% of your taxable income, 28% after the federal tax abatement, the SBD rate results in a 9% tax rate. 

Once you have calculated the SBD, enter it on line 430.

The following sections explain each of the above amounts.

Avoidance of the business limit and taxable capital limit

Where two corporations (Corps A and B) are deemed to be associated because they are associated with the same third corporation (Corp C), but because the third corporation, a CCPC, has filed a Schedule 28 election, they are deemed not to be associated with each other for determining the SBD, the following applies:

Preventing multiplication of the small business deduction

To address concerns about partnership structures that multiply access to the SBD, the specified partnership income rules also apply, for example, to partnership structures in which a CCPC provides services or property to a partnership during the tax year of the CCPC, where the CCPC or a shareholder of the CCPC is a member of the partnership. A similar measure also applies for corporate structures that multiply access to the SBD.

Line 400 – Income from active business carried on in Canada

Complete Schedule 7, Aggregate Investment Income and Income Eligible for the Small Business Deduction, to determine the following amounts:

CCPCs may now assign all or part of their business limit under subsection 125(3.2) or specified partnership business limit under subsection 125(8) to another corporation.

Use Schedule 7 to assign all or part of your specified partnership business limit to another corporation.

Also file Schedule 7 if another corporation assigned all or part of its business limit to your CCPC or if a member of a partnership assigned all or part of the member's specified partnership business limit to your CCPC.

If you are assigning all or part of your business limit to another corporation, report it on page 4 of the T2 return.

Note

If claiming a deduction for patronage dividends on line 416 of Schedule 1, complete Part 5 of Schedule 16 to establish active business income carried on in Canada (see the details about this schedule).

Active business income

Generally, active business income is income earned from a business source, including any income incidental to the business.

Income from a specified investment business or from a personal services business, and income described in subparagraph (a)(i) of the definition of specified corporate income in subsection 125(7) for the year are generally not considered active business income and are not eligible for the SBD. The following three sections explain when income from these types of businesses may be considered active business income and eligible for the SBD.

Specified investment business

A specified investment business is a business with the principal purpose of deriving income from property, including interest, dividends, rents, or royalties. It also includes a business carried on by a prescribed labour-sponsored venture capital corporation, the principal purpose of which is to derive income from property.

Except for a prescribed labour-sponsored venture capital corporation, income from a specified investment business is considered to be active business income, and is therefore eligible for the SBD if:

Note

The business a credit union carries on, or the business of leasing property other than real property, is not considered specified investment business.

Personal services business

A personal services business is a business that a corporation carries on to provide services to another entity (such as a person or a partnership) that an officer or employee of that entity would usually perform. Instead, an individual performs the services on behalf of the corporation. That individual is called an incorporated employee.

Any income the corporation derives from providing the services is considered income from a personal services business, as long as both of the following conditions are met:

However, if the corporation employs more than five full-time employees throughout the year or provides the services to an associated corporation, the income is not considered to be from a personal services business. Therefore, the income is eligible for the SBD.

Deductions in computing income for a personal services business are restricted to the following:

Note

Any expenses denied must be added back on Schedule 1.

For more information on the factors to take into account when a person is considered an employee, see Guide RC4110, Employee or self-employed or go to Canada Pension Plan (CPP) and Employment Insurance (EI) Rulings.

Reference
Paragraph 18(1)(p)

Specified corporate income

Generally, where a CCPC earns income that would otherwise be considered as income from an active business from providing property or services to another private corporation and it (or one of its shareholders) or a person who does not deal at arm's length with the CCPC (or one of its shareholders) holds a direct or indirect interest in that other private corporation, the income would not be considered as being eligible for the SBD unless certain conditions are met.

For more information, see the definition of specified corporate income in subsection 125(7).

Specified farming or fishing income

The definition of specified farming or fishing income replaced the definition of specified cooperative income, which has been retroactively repealed. The definition of specified corporate income excludes specified farming or fishing income, so that such income stays eligible for the SBD by default.

Specified farming or fishing income, of a corporation for a tax year, means income of the corporation (other than an amount included in its income under subsection 135(7), patronage dividends), if both of the following conditions are met:

This approach eliminates the requirement that sales have to be to a farming or fishing cooperative corporation in order to be excluded from specified corporate income.

Note

You have to request a reassessment if, in a previous year that started after March 21, 2016, you had income that meets the definition of specified farming or fishing income, but did not meet the definition of specified cooperative income. The CRA can reassess beyond the normal reassessment period for this specific purpose. See the information on how to request a reassessment.

Specified shareholder

A specified shareholder is a taxpayer who owns, directly or indirectly at any time in the year, at least 10% of the issued shares of any class of capital stock of the corporation or a related corporation.

How to calculate income from an active business carried on in Canada

Generally, to calculate active business income from carrying on a business in Canada, you have to deduct from net income for income tax purposes any of the following amounts that apply:

Specified partnership income

A corporation that is a member (or a designated member) of a partnership has to complete Schedule 7 to calculate its active business income.

The specified partnership income rules impose a limit on the amount of active business income earned by a corporation as a member or designated member of a partnership that is eligible for the SBD. The eligible amount is referred to as specified partnership income and is added to the corporation's active business income from other sources, if any.

For members of a partnership, their specified partnership business limit is normally their pro rata share of a notional $500,000 business limit for the partnership.

For designated members of a partnership, their specified partnership business limit is nil, unless they get an amount assigned from a member of the partnership.

If the partnership incurs a loss from carrying on an active business, you have to deduct the corporation's share of that loss from its active business income. This is referred to as a specified partnership loss.

If your corporation is a member of a partnership in respect of which it filed a Schedule 73, you have to add or deduct the total active business income determined under section 34.2.

If the corporation received an information slip T5013, Statement of Partnership Income, that shows its share of partnership income or loss, keep it in case the CRA asks for it later. Do not include this form with the return. For more information, see information slip T5013 and Guide T4068, Guide for the Partnership Information Return (T5013 Forms).

On line 400, enter the total active business income you calculated on Schedule 7.

References
Subsections 125(1), 125(7), 125(8), and 248(1)
Section 251
IT‑73, The Small Business Deduction

Line 405 – Taxable income for the SBD

The taxable income you use to calculate the SBD is usually the amount entered on line 360. However, if you have claimed a foreign non-business income tax credit, a foreign business income tax credit, or both, you have to reduce the taxable income by both of the following:

You also have to reduce taxable income by any amount that, because of federal law, is exempt from Part I tax.

On line 405, enter your taxable income for the purposes of calculating the SBD.

References
Paragraph 125(1)(b)
Subsection 126(7)

Line 410 – Business limit

The maximum allowable business limit for a corporation that is not associated with any other corporation is $500,000.

CCPCs that are associated with one or more corporations during the tax year have to file Schedule 23, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Business Limit. On this schedule, a percentage of the business limit is allocated to each corporation, and the total of all percentages cannot be more than 100%. For details about this schedule, see Schedule 23.

On line 410, enter the business limit for the year. If applicable, enter the amount from Schedule 23.

Notes

If the tax year is shorter than 51 weeks, you have to prorate the business limit, based on the number of days in the tax year divided by 365, before you enter it on line 410.

If a CCPC is associated with two other corporations and elects for the two other corporations not to be associated with each other for the purpose of the line 616 deduction, it has to file Schedule 28, Election not to be Associated Through a Third Corporation. For more details, see Schedule 28.

References
Subsections 125(2), 125(3), 125(5), and 256(2)
IT‑64, Corporations: Association and Control

Line 426 – Reduced business limit

The reduction in a CCPC's business limit is the greater of its taxable capital business limit reduction and its passive income business limit reduction for the year.

Taxable capital business limit reduction

Large CCPCs that have taxable capital employed in Canada of $50 million or more do not qualify for the SBD. The business limit is reduced on a straight-line basis for CCPCs that have taxable capital employed in Canada of between $10 million and $50 million in the previous year. For tax years starting before April 7, 2022, the range is $10 million to $15 million.

Similar restrictions apply to any CCPC that is a member of an associated group that has, in total, more than $10 million of taxable capital employed in Canada.

To calculate the total taxable capital employed in Canada, use the schedule that applies:

If your taxable capital employed in Canada is more than $10 million, file the appropriate schedule with your return.

Passive income business limit reduction

The business limit of a CCPC is also reduced if the CCPC, and any other corporation it is associated with, earn combined income from $50,000 to $150,000 from passive investments. The business limit is nil once the combined income from passive investments is more than $150,000. This income is calculated in Part 2 of Schedule 7, Aggregate Investment Income and Income Eligible for the Small Business Deduction, and is referred to as the adjusted aggregate investment income.

Enter the greater amount of the reduction on line 422 and the resulting reduced business limit on line 426.

Use Schedule 23, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Business Limit, if you are an associated CCPC. For more information about this schedule, see Schedule 23.

Reference
Subsections 125(5.1) and 125(7)

Assignment of the business limit under subsection 125(3.2)

CCPCs can assign all or part of their business limit under subsection 125(3.2) to another corporation.

Enter the amount of the business limit you assign and the business number of the corporation to which you assign such an amount on page 4 of the T2 return. Deduct from line 426 the amount you assign and enter the result on line 428.

If another corporation assigned all or part of its business limit to your CCPC, file Schedule 7.

References
Subsections 125(3.1), (3.2), and (7)

Line 430 – Small business deduction

Multiply the least of lines 400, 405, 410, and 428 by 19%. Enter the result on line 430 and at amount K on page 8 of the return.

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