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Accessing the CRA Small Business Deduction for your Business

Written by Sam Faris

Published on November 21, 2019

Last updated December 20, 2023

Table of Contents

    ACCESSING THE SMALL BUSINESS DEDUCTION IN YOUR BUSINESS

    The Small Business Deduction gives businesses a tax deduction on the first $500,000 of income. This saves an eligible corporation around up to $50,000 in income taxes. There are a number of conditions that have to be met to be eligible for this deduction that a Chartered Professional Accountant can help you consider. There are also complex exceptions that could get you in trouble in a CRA Audit Toronto, but which a Chartered Professional Accountant can help you navigate.

    In 2016 some changes were made to the small business deduction that impacted payments from private corporations to Canadian Controlled Private Corporations. Goods and services provided between private corporations results in ineligible income if there is any related shareholdings or interests in the two corporations. The rules can be very broad and you may be caught without even knowing it. A Chartered Professional Accountant can help you figure out areas of risk and avoid a CRA Audit. The details are not yet clear for the final provisions, but a tax lawyer in Ottawa or anywhere in Ontario can identify major issues that can affect many small business owners.

    The goal for the changes is to stop high-net worth individuals to lower their family tax rates by using multiple corporations owned by family members to earn income that related to the same business or business operations. Despite this beneficial intention to make the tax system more fair for middle income taxpayers, there may be some inadvertent traps that capture legitimate operations in separate companies owned by related persons. A CRA Audit Toronto can result in your or your family member being denied the deduction and as a result owing taxes, penalties, and interest. Get a Chartered Professional Accountant to review your business dealing with corporations where a family member has any interest to make sure you are safe in case of a CRA Audit Toronto. A little advice now can save you a lot of headache tomorrow.

    Accessing the CRA Small Business Deduction for your Business FAQs

    What qualifies for small business deduction in Canada?

    You should spend money on your business to qualify for the small business deduction on your taxes. Money spent on personal use doesn’t count. For example, you bought a desk for the office of your business. It counts as a business expense and a deduction. However, buying a desk and using it at home isn’t qualified for these kinds of deductions.

    What is the small business deduction limit in Canada?

    Your limit for a taxation year is $500,000. It’s prorated for the number of days in the year if there are less than 51 weeks. Business limits should be allocated amongst corporations associated in a year and are reduced by the share that the Canadian-controlled private corporation assigns to another corporation. Then, the remaining limit is further reduced on a straight-line basis if the combined taxable capital is between $10 million and $15million.

    How much income can a small business make without paying taxes?

    Entrepreneurs don’t have the formula that will help calculate how much their business can earn without paying taxes on it. Your annual business income will be combined with other non-business and business income on your tax return. Your potential itemized deductions, filing status, and other allowable deductions will determine your taxable income and resulting tax bracket. You may also have to consider whether an alternative minimum tax will apply to you and erase a portion of your deductions.

    How is small business deduction calculated in Canada?

    While the federal income tax rate is 28%, a small business will be taxed at 9%. Essentially, this is a deduction of 19%. However, this is the federal small business deduction and each province or territory may have different rules that apply.

    How much can a small business earn before paying tax in Canada?

    There is no minimum threshold. This means that any income generated by a small business is taxable. However, there are small business deductions at both the provincial and federal levals.

    What qualifies as a small business in Canada?

    A small business in Canada is any company that has between 5 to 100 employees.

    About the Author

    Picture of Sam Faris

    Sam Faris

    CPA, CGA, LPA, CPA (C.O.) (Expired), FACCA (U.K.)

    Sam Faris, President of Faris CPA, is a Licensed Public Accountant in Ontario, with affiliations to CPA Ontario, CPA USA, and FACCA U.K. Since 2003, he's excelled in resolving CRA disputes and tax audits. His firm offers diverse services, from bookkeeping to corporate tax planning, serving a wide client base. Renowned for his formidable track record against the CRA, Sam is a committed advocate and expert in tax resolution.

    Learn more about Sam Faris
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    ACCESSING THE SMALL BUSINESS DEDUCTION IN YOUR BUSINESS

    The Small Business Deduction gives businesses a tax deduction on the first $500,000 of income. This saves an eligible corporation around up to $50,000 in income taxes. There are a number of conditions that have to be met to be eligible for this deduction.

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