Changing Rules for Small Business Deductions
Small Business Corporations have historically received generous tax treatment for a number of reason, including the goals of compensating for their higher cost, allowing greater re-investment in local economies, and supporting jobs creation. One such tax-support used by a Chartered Professional Accountant is the Small Business Deduction.
As any Chartered Professional Accountant knows, the Small Business Deduction provides qualifying businesses a lower tax rate on the first $500,000 of active business income – an annual tax savings of about $50,000. There are complicated rules that come up in a CRA Audit on who and how much of this break is available. It’s always preferable to have a Chartered Professional Accountant examine your books before a CRA Audit and use a Voluntary Disclosure to correct mistakes.
As if the rules weren’t complicated enough, landing many businesses in trouble during a CRA Audit, new Bill C-29 will make the application of the rules less certain and more complicated for Chattered Professional Accountants. This will lead to greater interest and penalties on a CRA Audit, and greater use of a Voluntary Disclosure by businesses to fix mistakes.
The consequences of the changes may not be evident until a CRA Audit. One potentially problematic new change is the limitation of access to the deduction where two corporations are considered to be financially integrated. They are meant to stop artificial multiplications of the deduction by tax planners, but will likely capture legitimate structures and unknowing businesses. If members of your immediate family are shareholders in any corporation that your company provides services to, contact a Chartered Professional Accountant to examine your dealings. Being proactive will avoid the aftermath of a CRA Audit since you can fix mistakes using a Voluntary Disclosure with the help of a Chartered Professional Accountant.
Disclaimer: Articles are for general information only and do not constitute tax advice. They cannot be relied upon.
Sam Faris is a Toronto-based Chartered Professional Accountant who practices as an independent consultant on high-level Canadian tax matters and handles disputes with CRA. He has recently published an article a business magazine: HERE.