The small business deduction generally applies to the first $500,000 of the active business income of a Canadian-controlled private corporation (CCPC). The “deduction” is actually a deduction from tax, not from income, so it is really a credit. It results in a combined federal and provincial rate of around 9% to 13%, depending on the province. The $500,000 threshold also applies to each province, except for Saskatchewan, which has a $600,000 limit for provincial tax purposes.
However, the $500,000 annual threshold ($600,000 for Saskatchewan) must be shared by two or more CCPCs if they are “associated”. This rule prevents the multiplication of the $500,000 threshold by individuals setting up CCPCs. For example, if I own and control two CCPCs, they are associated, and I am not allowed to double up the $500,000 limit. Instead, the two CCPCs must share the limit. I can allocate any amount to the two corporations as long as the total amount allocated does not exceed $500,000.
So when are corporations associated? As noted above, two corporations are associated if they are controlled by the same person. But two corporations are also associated with each other if:
- one of the corporations is controlled by the other corporation,
- both corporations are controlled by the same group of persons,
- each of the corporations is controlled by a person, the person who controls one of the corporations is related to the person who controls the other, and either of those persons owns at least 25% of the shares of any class of each corporation,
- one of the corporations is controlled by a person, that person is related to each member of a group of persons that controls the other corporation, and that person owns at least 25% of the shares of any class of each corporation, or
- each of the corporations is controlled by a related group of persons, each of the members of one of the groups is related to all of the members of the other group, and one or more persons who are members of both groups own at least 25% of the shares of any class of each corporation.
A “group” simply means two or more persons. A “related group” means a group of persons each member of which is related to every other member of the group.
Control for these purposes includes the normal rule for income tax purposes, being de jure control or control “in law”. This generally means the ownership of more than 50% of the voting shares in the corporation.
However, control for the purposes of the associated corporation rules also include de facto control, or control “in fact” (which has its own definition in the Income Tax Act).
On top of that, there are various “deemed” control provisions under the association rules. For example, a person or group of persons is deemed to control a corporation if they own shares representing more than 50% of the fair market value of all of the shares in the corporation, or common shares representing more than 50% of the fair market value of all of the common shares of the corporation. Under another deeming rule, if a parent controls a corporation, and the parent’s child under age 18 owns shares in another corporation, the parent is deemed to own the child’s shares in the other corporation. There are also other deeming rules.
Furthermore, as noted above, it is often necessary to determine whether persons or corporations are “related” in determining whether corporations are associated. The “related” concept is different than the “associated” concept. For example, if I control one corporation and my spouse (or adult child) controls another corporation, the two corporations are related. However, they are not associated, unless one of us also owns at least 25% of the shares of the other person’s corporation (see item (c) in the above list). So I can run my own business through my corporation and my spouse or adult child can run their own business through their own corporation without worrying about sharing the small business limit, as long as the 25% rule does not come into play. (However, there is an anti-avoidance rule: the corporations can be considered associated if one of the reason for setting up two corporations rather than one was to multiply access to the small business deduction.)