Only income earned by an Active Business of a Small Business Corporation is eligible for the lower tax rate, by application of the small business deduction, up to the corporation’s small business limit.
BUT WHAT IS ACTIVE BUSINESS INCOME?
Simply, “Active business” is defined by the Income Tax Act to be a business that is carried on by a Canadian resident taxpayer that is not one of two types of business. The first type that doesn’t qualify is a “specified investment business”. The second type of business that is not an active business is a “personal services business”. A specified investment business is a business whose primary purpose is to earn income from property (rent, interest, royalties, etc), while a personal services business refers to an incorporated employee. The definitions are a bit more complex, but the simple definitions will suffice in most cases.
Case Study
A new client had a difficult CRA audit that disallowed an HST refund valued at almost one million dollars. The CRA audit revealed that his previous accountant had made significant errors which resulted in the disallowing a very significant HST refund.
Sam Faris and his team performed an intensive review of the proposal letter from the CRA along with the income tax act. We were convinced that the case would be won if the records were corrected and a new argument was submitted as a replace to the proposal letter from the CRA.
The CRA auditor denied the response. Our firm filed a Notice of Objection to the CRA.
The Notice of Objection was successful, and our client was able to recover, not only the original refund, but there were additional amounts that the previous accounted had missed that were awarded to our client as well.