Corporations are normally taxed federally at a rate of 38 per cent.
However, one of the tax reductions available is the ability to claim the small business deduction of 17 per cent up to the small business limit of $500,000 provided that the corporation qualifies for the deduction.
The purpose of the deduction is to help smaller businesses retain more after tax income for reinvestment and expansion to fight the higher financing and capital costs that face small incorporated businesses.
The small business deduction is defined in Section 125 of the Income Tax Act.
In order to qualify for this deduction the corporation must be a Canadian controlled private corporation that carries on active business in Canada, including an adventure in the nature of trade.
A Canadian controlled private corporation means that the corporation is a small business corporation that must be incorporated in Canada and have its head office in Canada.
It can have non-resident shareholders, but it must be controlled by Canadian resident shareholders.
It must be a private corporation that does not trade stock on any stock exchange.
An adventure in the nature of trade means that the business attempted to enter into a sideline or other business venture where it would not normally operate in order to determine whether it could expand into that area.
A small business corporation is defined as a corporation that uses 90 per cent of the fair market value of its assets to create active business income in Canada.
The definition of an active business in Canada means that the corporation must be receiving operating income in Canada excluding income from property.
It cannot be a specified investment business and cannot be a personal services business.
The purpose of a business needs to be determined on an annual basis to determine if it still qualifies for the deduction.
A specified investment business is defined as a business that receives most of its income from property.
Such as interest, dividends, rentals from real estate and royalties.
The exceptions are if the company is in the business of leasing property or if the company has five or more employees, or if the company provides administrative, managerial, financial, maintenance or other similar services to an associated corporation qualifying for the deduction.
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