In the Canadian government's proposed corporate tax system, the Small Business Deduction (SBD) stands out as a key tax benefit. Designed to encourage small business development, the SBD offers the opportunity to significantly reduce corporate taxes on a portion of taxable income.
At T2inc.ca, we understand the importance of maximizing your tax benefits. That's why our corporate tax specialists can help you not only understand how the SBD works, but also determine if your company qualifies for this deduction.
What is the federal SBD?
The SBD is a tax measure designed to reduce the tax burden on Canadian small businesses and thereby promote their growth and competitiveness. The SBD mechanism is based on the application of a reduced tax rate to a specified portion of a corporation's taxable income.
Reduced corporate tax rate
At the federal level, the reduced tax rate granted under the SBD is approximately 9%. This rate is significantly lower than the standard corporate tax rate and represents a significant savings for eligible small businesses.
This reduced rate applies only to the corporation's first tier of taxable income up to a certain threshold.
Income range eligible for the SBD
For tax year 2023, the taxable income eligible for the SBD is capped at $500,000. This means that the first $500,000 of taxable income generated by a small business is eligible for the reduced 9% rate.
Taxable income above this threshold is taxed at the standard corporate rate, which is 15% after federal and state tax deductions.
Eligibility requirements for Small Business Deduction
To qualify for the small business deduction, a corporation must meet certain CRA criteria and rules.
To be eligible, a corporation must:
- Be incorporated as a Canadian controlled private corporation (CCPC).
- Generate active income in Canada.
- Not exceed the current year's taxable income threshold, adjusted for inflation and other economic variables.
It's important to note that certain types of income and activities may be excluded from active income eligible for the SBD, underscoring the importance of a well-thought-out tax strategy.
Calculating the Small Business Deduction
The calculation of the small business deduction is relatively straightforward. It involves multiplying the amount of eligible taxable income (up to $500,000) by the reduced tax rate of 9%. The result represents the amount of tax payable on that level of income, before any additional tax credits or deductions are applied.
Illustrative example
Assume a small business has taxable income of $600,000 for tax year 2023. The first $500,000 qualifies for the reduced rate of 9%, while the remaining $100,000 is taxed at the higher standard corporate rate.
- On the eligible $500,000: $500,000 x 9% = $45,000 tax.
- On the excess $100,000: $100,000 x (standard rate) = tax at standard rate.
Relationship to the Quebec SBD
It's worth noting that the federal has a Quebec equivalent, known as the DPE or small business deduction. While they share the common goal of supporting small businesses, the Quebec SBD has its own unique features.
Read our article to learn more about this deduction. Our CPA accountants and tax specialists explain the specific benefits of this deduction for Quebec businesses.
T2inc.ca can help you manage your taxes
The SBD offers a significant opportunity for tax savings for Canadian small businesses. However, to maximize these benefits, strategic tax planning is essential. This may include managing taxable income to stay within the small business deduction threshold, or making judicious use of other tax credits and deductions.
At T2inc.ca, our goal is to help you make the most of available tax benefits, such as the SBD, to support the growth and success of your business. We're here to support you in the Canadian tax arena, providing you with the necessary resources and an online corporate tax solution to save you money.
Contact us today for expert assistance from T2inc.ca.
Frédéric Roy-Gobeil
CPA, M. TAX
As President of T2inc.ca and an entrepreneur at heart, I have founded many start-ups such as delve Labs and T2inc.ca. A former tax specialist at Ernst & Young, I am also a member of the Ordre des comptables professionnels agréés CPA and have a master's degree in taxation from the Université de Sherbrooke. With a passion for the world of entrepreneurship and the growth mindset, I have authored numerous articles and videos on the industry and the business world, as well as on accounting, taxation, financial statements and financial independence.
