Each province and territory also has their own corporate and small business tax rates. In Ontario, the general corporate tax rate is 11.5%. The small business tax rate is 3.2%. This means that the combined federal and provincial taxes paid on active business income is 26.5% for corporations in general, and 12.2% for small businesses.
This is a substantial tax saving.
But what qualifies a business as a small business?
Small businesses are Canadian-controlled private corporations (CCPCs) that qualify for the small business deduction (SBD).
The small business deduction provides corporations with a reduced tax rate on up to $500,000 of active business income. Federally, this can save businesses up to $30,000 in taxes every year federally. Businesses would also have reduced provincial taxes as well.
This $500,000 is claimed by a single corporation or a group of CCPC that are associated for income tax purposes.
There are, however, limitations on who can claim the small business deduction.
Firstly, the SBD will be gradually reduced for a CCPC (or group of CCPCs) when taxable capital exceeds $10 million. Once a CCPC has $15 million in taxable capital, the SBD is eliminated.
However, the 2022 budget proposed to change the upper limit of the reduction window to $50 million in taxable capital. This would allow more CCPCs to be eligible for the reduced small business tax rate. The proposed change will be available to CCPCs whose tax year starts on or after April 7, 2022. If your business has a calendar year end, the change will be effective in the 2023 tax year.
Under the current SBD program, the SBD reduces by $100,000 for every $1 million of taxable income, zeroing out at $15 million in taxable capital. Under the proposed changes, the reduction amount would be $12,500 for every $1 million of taxable capital, zeroing out at $50 million.
In addition to the taxable capital restrictions, there’s an additional restriction to the SBD amount when a CCPC (or group of associated CCPCs) has investment income exceeding $50,000 in a given taxation year. In these situations, the SBD is slowly reduced and is eliminated once investment income exceeds $150,000.
If you are interested in learning more about the small business tax rate, the small business deduction or how changes to the SBD will affect you, contact our team of chartered professional accountants today. We can help you determine whether you are eligible to access additional savings and identify other tax saving opportunities.