Small Business Deductions

Deduction and Tax credits available to private corporations

Owning a small business entitles you a Small Business Deduction on your active business income (ABI), reducing the amount of tax that your business might otherwise have to pay.

According to CRA, to qualify for the Small Business Deduction, a corporation has to be a Canadian-controlled private corporation (CCPC), which meets all the following conditions:

• it is a private corporation;
• it is a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year;
• it is not controlled directly or indirectly by one or more non-resident persons;
• it is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
• it is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada;
• it is not controlled directly or indirectly by any combination of persons described in the three previous conditions;
• if all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange, were owned by one person, that person would not own sufficient shares to control the corporation; and
• no class of its shares of capital stock is listed on a designated stock exchange.

The small business deduction currently provides for an 11% to 15% (depending on which province you reside in) federal tax rate on a CCPC’s ABI. However, only a limited amount of income qualifies for this deduction. The current federal limit is $500,000.

Additional tax deductions

For additional tax credits on your Canadian small business, you can claim business-use-of-home expenses if you have a dedicated work space in your home to earn business income, as well if the work space is where you do more than 50% of your work. To calculate your business-use-of-home expenses, you will first need to calculate the area by square feet in your home that is used for business conduct. By using this percentage, you can claim costs that relates to your work space, such as electricity, heating, maintenance, cable, mortgage interest etc. (there are some limitations check with your professional accountant)