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The Small Business Deduction & You

DID YOU KNOW: Canadian-controlled private corporations (CCPCs) are entitled to claim a small business deduction on any active business income earned in Canada? This deduction is one of the most beneficial of all income tax deductions available to Canadian corporations — it has the ability to reduce the amount of Part 1 tax that your corporation would have to pay otherwise.

So if your corporation qualified for the Small Business Deduction you would pay tax at the rate of 12% in Alberta, while a corporation of another type also in Alberta would pay tax at a rate of 27% —  meaning you could save 15%!

Active Business Income in Canada

This could be any business in Canada excluding:

  • A business that derives its income from property and has less than six full-time employees; and
  • A business that provides personal services through a corporation, has fewer than six full-time employees, and the individuals providing the services are considered “employees” or “officers” of the entity using those services.

It’s important to note that the rate and the amount of income that qualifies for the lower tax rate varies from province to province. 

Canadian-Controlled Private Corporations

Funny story; “Canadian corporation” doesn’t mean any corporation operating in Canada, and to qualify for the Small Business Deduction a corporation has to be a Canadian-controlled private corporation (CCPC).

In order to claim the small business deduction and be classified as a CCPC, all of the following conditions have to be met according to Chapter 1 of the T4012 – T2 Corporation Income Tax Guide:

  • It is a private corporation;
  • It is a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year;
  • It is not controlled directly or indirectly by one or more non-resident persons;
  • It is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
  • It is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada;
  • It is not controlled directly or indirectly by any combination of persons described in the three previous conditions;
  • If all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange, were owned by one person, that person would not own sufficient shares to control the corporation; and
  • No class of its shares of capital stock is listed on a designated stock exchange.

Larger corporations will find that their ability to claim the small business deduction is restricted… The restriction applies to CCPCs whose taxable capital exceeds $10 million for the preceding year. These limits are also determined on an associated group basis.

In the end, qualifying as a CCPC is the best possible income tax scenario for a Canadian corporation. The Small Business Deduction is just one of the income tax advantages such corporations can benefit from.


Unsure if your business qualifies? Want a second opinion? Contact one of our business advisors:

info@kbh.ca