Part 2: Corporate Federal Taxes Changes

3.  Small Business Deduction Changes

In Budget 2016, Liberal government introduced new measures on small business deduction (SBD) changes.  The changes include the following:

• Specified Partnership Income
• Specified Corporate Income
• Avoidance of the Business Limit and the Taxable Capital Limit

Specified Partnership Income (SPI)

In the past, a partner of a partnership could incorporate and provide services to the partnership through his corporation to receive full SBD.  However, in Budget 2016, new concepts of "Designated Member" and "Specified Partnership Business Limits" were introduced.  With these two new concepts, the meaning of SPI has amended so that the partner can only share portion of SBD within the partnership interest that he owns even though he incorporated.

Specified Corporate Income (SCI)

Similar to the concept of SPI, a new concept of SCI was introduced in Budget 2016.  Whenever a Canadian Controled Private Corporation (CCPC) is earning income from a related private corporation, only the amount that is eligible for SCI can receive SBD.  The SCI includes the least of:

(a) private corporation income

(b) the amount that the private corporation assigned SBD to CCPC relating to the income earned from private corporation

(c) the amount that the Minister determines to be reasonable in the circumstances

Avoidance of the Business Limit and the Taxable Capital Limit

Per Budget 2016, starting March 21, 2016 (the date of Budget 2016 announced):

(a) investment income derived from an associated corporation’s active business will be ineligible for the small business deduction and be taxed at the general corporate income tax rate where the exception to the deemed associated corporation rule applies 

(b) the third corporation will continue to be associated with each of the other corporations for the purpose of applying the $15 million taxable capital limit, when the exception to the deemed associated corporation rule applies 

These changes were part of Bill-C29 and received Royal Assent on December 14, 2016.  

In Summary:

Small Business Deduction Changes:

• Specified Partnership Income and Specified Corporate Income are introduced to restrict the application of multipilcation of small business deduction.
• The anti-avoidance rules have been broadened for business limit and taxable capital limit on investment income and associated corporations.

For more information, please contact us @ 604-639-3229 or info@theresalocpa.ca

Note:  All information relating to the small business deuction changes above is available from Government of Canada website.

By Theresa Lo, CPA, CGA

October 11, 2017