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Taxable Capital Employed in Canada and the Small Business Limit

Calling all small business owners! Did you know your company might have access to a significant tax advantage called the Small Business Deduction (SBD)? Eligibility depends on your company’s status as a Canadian Controlled Private Corporation (CCPC) and the amount of its taxable capital employed in Canada.

CCPC and SBD

A CCPC is a privately-held company incorporated in Canada that is not controlled directly or indirectly by non-residents and/or public corporations.

A key benefit enjoyed by CCPCs is the SBD—a lower tax rate on active business income up to a certain limit. For 2018, the federal and provincial limits is $500,000 with the exception of Manitoba ($450,000) and Saskatchewan ($600,000). As an example, if your corporation in B.C. earned active business income of $700,000, the first $500,000 would be taxed at the reduced SBD rate of 12% while the remaining $200,000 would be taxed at the higher general rate of 27%–more than double the small business rate!

Why does Taxable Capital Employed in Canada matter?

In order to get the full SBD, your company’s taxable capital employed in Canada cannot exceed $10,000,000. If it exceeds $10,000,000, the $500,000 limit begins to be reduced and is completely eliminated once taxable capital employed exceeds $15,000,000. For instance, if your corporation has taxable capital employed of $12,500,000, then its small business limit is reduced to $250,000 and any active business income over $250,000 is subject to the higher general tax rate. If your corporation’s taxable capital employed is $16,000,000, you will not receive any SBD at all.

Also note that if you own multiple companies, the small business limit is shared among all associated companies so the combined taxable capital employed in Canada for all companies cannot exceed $10,000,000 for the full SBD.

How do I calculate my company’s Taxable Capital Employed in Canada?

For most small businesses, taxable capital employed in Canada will simply be their retained earnings. Other common additions and deductions among small businesses are below.

Items that increase your taxable capital employed in Canada:

  • Your corporation’s share capital
  • Loans and advances to the corporation
  • Indebtedness of the corporation (bonds, notes, mortgages, etc.)
  • Dividends declared but unpaid before the end of the year

Items that decrease your taxable capital employed in Canada:

  • The carrying value of the following assets held by your corporation:
    • Share capital of other corporations
    • Loans or advances to other corporations
    • Bond, note, mortgage, or similar obligation of another corporation
    • Dividend receivable from another corporation

Our Recommendation

Given the significant benefits of the small business deduction, it pays to keep careful track of your taxable capital employed in Canada and apply relevant tax planning strategies. For more information on this and other taxation matters for small businesses, please contact us today.

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