The Small Business Deduction is a Canadian Income Tax (T2) Deduction available to Businesses that were Canadian-Controlled Private Corporations (CCPCs) throughout a particular Tax (T2) year. It cuts back the Part I Tax (T2) that a corporation would have to pay otherwise.
CCPC is a private corporation that is incorporated in Canada (Canadian resident) with perfectly no direct/indirect foreign control or public corporation, or listed on a foreign or any stock exchange.
Effective January 1, 2008 the Small Business Deduction rate is 17% federal Tax (T2) rate on active business income, dependent on the level of income (currently the limit is CAD$500,000); which would otherwise be between 15% to 28%. In other words it applies to the first $500,000 of a corporation’s income.
Active Business includes any business/trade income other than income from property, such as: rent and royalties, etc.; or a corporate that provides personal services, or has less than 6 full-time employees.
That being said, corporations providing personal services are subject to the highest Tax (T2) rate of 28%, and qualify for deductions only on income and benefits for the incorporated employee.
Large corporations may also qualify for the Small Business Deduction, provided the corporation is a CCPC with a Taxable capital (includes retained earnings, long-term debt, etc.) between $10 million to $15 million, and nothing more.
Some provinces also provide the Small Business Deduction, however the low Tax (T2) rates, and qualifying income limits vary from province to province.
For Example: A corporate earns $750,000 in a Tax (T2) year; by using the Small Business Deduction, the corporate will pay federal Taxes (T2) at a rate of 11% on $500,000, and the remaining amount of $250,000 will be taxed at 15%.
When formulating its corporate income Tax (T2) form, a Canadian-controlled private corporation claiming the Small Business Deduction would calculate its allowable Small Business Deduction by multiplying the Small Business Deduction rate by the least of the following amounts:
- The income from active business carried on in Canada;
- The taxable income;
- The business limit; or
- The reduced business limit (Canada Revenue Agency).
The maximum allowable business limit for a corporation that is not associated with any other corporation is $500,000 for the calendar year 2009 or later ($400,000 if the calendar year is 2007 or 2008).
As with any information Business Development Centre presents regarding Taxes (T2), Deductions and the like, always talk to Accountable Business Services (ABS) ABSPROF and/or call the CRA for the final authority.
The CRA allows any “reasonable business expense” as a Deduction. It defines business expenses as “certain costs that are healthy for a particular type of Business, and that are found for the aims of earning income. Business expenses can be deducted for Tax (T2) purposes. Personal, living, or other expenses not affiliated the business cannot be deducted for Tax (T2) purposes.”
Be aware that what is “reasonable” for one business may not be for yours. Again, it must be used for a specific business purpose – if you buy and /or use vehicles or equipment for both personal and business purposes, be sure to identify each, and only claim the business portion. All expenses must be supported by receipts and these must be kept for at seven years in case of a CRA audit.
Partial List of Common Deductions:
- Accounting & Legal fees (related to business activities)
- Advertising expenses
- Automobile expenses
- Bank Charges
- Business Taxes & Business Licenses
- Collection Agency fees
- Conference and Convention fees
- Expert Advice (consultant fees, for instance)
- Interest expenses (on money borrowed to run your business)
- Insurance expenses (for buildings, machinery or equipment)
- Internet and web hosting fees (business use)
- Membership Dues (for business-related organizations)
- Meals and Entertainment expenses
- Office Rent expenses
- Office Supplies expenses
- Postage & Courier expenses
- Private Health Service Plan (PHSP) premiums
- Promotion expenses
Tax (T2) situations can be complicated, and abiding by the Tax (T2) regulations may be further stressful especially if there are possibilities of penalties for non-compliance.
If you have any Tax (T2) related questions or need help with Tax (T2) Planning or filing please contact Accountable Business Services (ABS) ABSPROF. Our Tax (T2) professionals are highly-experienced with U.S. and Canadian Tax laws and can offer you the correct counseling to address your Tax situation.
Accountable Business Services (ABS) ABSPROF is a full service accounting and tax firm with a committed squad of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international Tax laws.
Accountable Business Services (ABS) ABSPROF is a leading Accounting Firm specializing in Small Businesses Deduction and Accounting in Alberta. ABS offers Small Business Deduction and Accounting Services specially in Edmonton, Calgary, Red Deer, St Albert, Strathcona County, Calgary, Red Deer, Lethbridge, Medicine Hat, Fort Mcmurray, Grande Prairie, Airdrie, Banff Canmore, Lloydminster and all across Canada and U.S on a very affordable rates.
As an accounting firm, we get you the highest return because we’re well-found with up-to-date information of laws and regulations. We believe in quality and professionalism, which we provide to each client both in knowledge and in practice. We maintain a firm relationship with our clients through regular communication, honesty, adhering to deadlines and understanding each client’s needs. We work around your schedule.
Our Accounting and Tax (T2) experts understand that running a business can be boring; thus, we are here to relieve your Accounting worry by taking charge of your Small Business Deduction and Accounting demands. Our services include Bookkeeping, Tax (T1 & T2) Returns (Corporate and Personal), Financial Statement Preparation, Financial Forecasting, Budget Management, Business Consultation, and Business Planning for new business start-ups. Our services also includes, Cross Border Taxation and Business Planning, U.S. Personal and Corporate Taxation, Retirement Planning, Estate Planning and Inheritance Tax Advice
So if you worry regarding to your Small Business Deduction and Accounting Services then Accountable Business Services (ABS) ABSPROF is here for your service. Feel free to Contact Us on our following contact details.
Contact Details
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