Small Business Deduction: Eligibility and Calculation

The Quebec government has offered several opportunities to reduce corporate taxes as a small business deduction (SBD). This tax deduction, which takes the form of a reduced tax rate applicable on the first $500,000 a company makes, encourages the growth of small businesses. To benefit from the lowest rate, the company's employees must work at least 5,500 hours combined.

Understanding business tax in Quebec can be tricky. Questions often rise when it comes to these 5,500 hours. How can my business qualify for the SBD? Can the hours worked by a shareholder be counted towards the 5500 hours? These are some questions that our experts at T2inc will explain.

How to qualify for the Small Business Deduction (SBD)

In order to qualify for the small business tax deduction (SBD) to reduce the amount of your business taxes, your company must meet certain requirements related to hours worked. This is the 5,500-hour rule:

• The number of paid hours of all the company’s employees must be equal to or greater than 5500 for the tax year
• The number of paid hours of all the company’s employees and the employees of the companies of which it is associated for the same tax year must be equal to or greater than 5,500 from the previous tax year

The SBD will depend on the number of hours paid and will be reduced in a linear manner if this figure is between 5,500 and 5,000. This lets companies who do not reach the required level benefit from a portion of the deduction.

This rate will be applied over a full tax year. If, for administrative reasons, the year is incomplete then the limit will be adjusted on an ad hoc basis.

Small business deduction calculation

In order to qualify for the 5,500 hours, the employee's paid hours must also meet certain requirements. A company that does not meet these criteria will not be eligible for SBD.

• Paid hours must be worked and worked hours must be paid
• The maximum number of hours worked is 40 hours per week per employee
• All professionals on the payroll are considered employees

Despite these requirements, there are still some nuances that are important to know about the 5,500-hour rule to claim the SBD. Get the most out of your annual tax return by ensuring that all your workable hours are accounted for.

Does a shareholder’s work count towards the SBD?

According to Revenu Quebec, a shareholder is considered an employee of the company. As such, their activity within the company is considered in the 5,500 hours. It is therefore possible to count up to 40 hours of work per week of a shareholder in the calculation of the 5,500 hours required to benefit from the SBD.

A shareholder will be able to add a maximum of 2,080 hours to the total hours worked by a company. If the shareholder chooses to take a vacation, just like any employee, these hours are deducted from the total number of hours worked.

To include a shareholder's hours worked to qualify for the SBD, you will need to provide rigorous documentation to satisfy Revenu Quebec. T2inc can help you ensure that your business taxes have all the documentation needed.

Do the hours of a shareholder need to be compensated?

To qualify for the SBD calculation, the shareholder's hours worked might have to be compensated. There is a difference depending on the status of the shareholder: Are they a majority shareholder or a minority shareholder?

Hours worked by a majority shareholder

A majority shareholder of a company is a person who owns more than 50% of the company either directly or indirectly. They must own more than half of the shares carrying full voting rights in the capital stock of a company.

According to Revenu Québec, the majority shareholder of a company can count their work hours towards the 5,500 hours even if they do not receive a salary or if they receive a salary lower than the value of their active participation in the company. In practical terms, whatever the majority shareholder's salary may be, their hours worked can be included in the calculation of the small business deduction.

Be careful of “spillover”, since some majority shareholders may own the majority of the shares of several corporations, the hours counted for each corporation must add up to a realistic total. The definition of "realistic" will depend on the assessment of the tax authorities. Logically, the shareholder cannot work more hours than there are in a week combined!

Hours worked by a minority shareholder

A minority shareholder is a person who owns less than 50% of the company's stock and takes part in the activities of said company. Therefore, like all employees, their hours can also be counted towards the 5,500 hours required to benefit from the SBD.

Unlike the majority shareholder, and except as provided for in the regulations in workplace protection standards, the hours worked by the minority shareholder must be compensated. The salary paid for these hours must be at least equivalent to the minimum wage of the corporation. The minority shareholder must be considered an employee of the corporation to benefit from this tax assistance program.

File your corporate taxes with T2inc

To take full advantage of the tax deductions available to you, such as the SBD or business vehicle deductions, you must be able to meet certain requirements according to Revenu Quebec. This is the case for the hours worked by any employee, and whether they are a majority shareholder or not. If you wish to maximize your tax deductions and access the eligible assistance and resources for your business, use the Quebec tax experts at T2inc.

Our team of tax experts will work with you to present the best corporate tax options available. Contact us for more information on our services. We will introduce you to our comprehensive corporate tax solutions that will benefit your corporation in Quebec!