As of 2019, Canadian Controlled Private Corporations (CCPC) who were previously entitled to the Small Business Deduction may be subject to a claw-back that reduces their deduction, if it doesn’t eliminate it completely.
Currently, public, private and non-resident controlled Canadian corporations are subject to a combined corporate tax rate of 26.5% in Ontario. Where that corporation is a CCPC, a small business deduction (SBD) can be applied to the first $500,000 of active business income, resulting in a preferential tax rate of 12.5% on this income.
To stop companies with a large access to capital from taking advantage of this deduction, which was meant to assist small Canadian businesses, a claw-back exists.
Where a corporation has more than $10 million in taxable capital, the deduction will gradually decrease, $1 for $1. This means that a corporation with aggregate taxable capital of $15 million will no longer receive the SBD.
It is important to note, that in order to prevent business owners from incorporating multiple CCPCs for the benefit of spreading out income in an attempt to take advantage of the SBD multiple times, the taxable capital of associated corporations is combined when determining the SBD.
Generally, an associated corporation includes;
- two or more corporations controlled by the same person or group of people;
- two corporations that are run by related parties (individual or group) where either owns at least 25% of the shares in each company;
- or two corporations in which one of the corporations controls the other.
So, What is the New Claw-Back?
Starting in 2019, a new claw-back will be implemented for the SBD. This claw-back will look at the passive income of a corporation. Where passive income exceeds $50,000, the SBD will be reduced by $5 for every $1 of passive income. This means that corporations with $150,000 in passive income will have their SBD eliminated.
The intention behind the new claw-back, like the taxable capital claw-back, is to stop larger companies from taking advantage of the SBD, which was meant to incentivize small businesses. It is assumed, that if a company has $50,000 or more in passive income, that they do not require this incentive.
Similar to the taxable capital claw-back, the passive income claw-back will consider the aggregate passive income of associated corporations.
It is possible, under these new rules, for two companies who are otherwise similar, to be treated differently simply based on their investment choices. That is why, to ensure that you optimize your SBD and after-tax position, while minimizing the claw-back, your investment holdings must be properly structured in consideration of these changes.
For more information or assistance with your tax planning strategy, contact us today.
