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Written by: Lyndon Braun, CPA, CA
On March 22, 2016 the Liberal government of Canada tabled their first federal budget. Given the change in government and some of the pre-budget press coverage, it was one of the most highly anticipated budgets in many years.
One of the major theme’s to come out of the federal budget, from a corporate tax perspective, was “One business, one small business deduction”. The budget proposed changes, in a variety of ways, to eliminate the common tax planning strategies that have been utilized to multiply the small business deduction. The proposed changes will have a widespread impact on many corporate and partnership structures.
As background, the small business deduction allows small businesses to have the first $500,000 of business income taxed at 13% in British Columbia. The small business deduction is shared among commonly controlled groups of companies and is eliminated as these companies increase in size; with $15,000,000 in combined equity and liabilities being the current threshold to determine when a company (or group of companies) is considered “large”.
The low rate of tax is attractive for many reasons:
- Allows companies to pay lower tax on their business income, leaving after tax profits in the company to be reinvested and to grow and expand the business;
- Provides a large deferral of income tax for the owners of incorporated businesses, providing owners with significantly more after tax capital to invest for personal savings within a corporate structure.
The attractiveness of the low rate of tax has meant that significant tax planning has gone into creating partnerships and corporate groups that allow multiple access to the small business deductions. Each additional small business deduction creates a tax deferral of $65,000 on an annual basis and had become a very common planning technique.
Many professional firms such as accounting, law, architecture and engineering practices have been structured to allow each individual partner (operating as an incorporated entity) in the business to access their own small business deduction. Further many other operating businesses with multiple owners have been structured so that each owner may obtain the benefit of their own small business deduction.
Budget 2016 proposes to end this practice by having each corporate partner/owner (and any corporations to which they are related) deemed to be members of the partnership which operates the business, requiring them to share one small business deduction for the entire business.
Similarly, corporate and partnership structures that utilize the payment of fees to shift income to corporations owned by related persons have been affected by the introduction of the term “specified business income”. This specified business income will not be eligible for the small business deduction unless the corporation from which the income arose allocates a portion of its annual $500,000 business limit to the recipient corporation. Again, this is targeted legislation to prevent the multiplication of the small business deduction.
Lastly, consequential amendments have been proposed to eliminate planning that was previously undertaken to avoid the $15,000,000 large corporation threshold.
The proposed budget legislation supporting the theme of “One business, one small business deduction” will have a wide and significant impact on the corporate tax liability for many companies and partnerships beginning in tax years commencing after budget day on March 22, 2016. As a result, many business owners will need to review their corporate structure to determine how it is being utilized and if it is still beneficial and relevant to meet their objectives.
Please contact Lyndon Braun of the Manning Elliott Tax Team with any questions on these new rules and the 2016 small business deduction.
Lyndon Braun, CPA, CA is Senior Tax Manager, Manning Elliott LLP. To contact Lyndon, please call him at 604-557-5768 or email him at firstname.lastname@example.org.
The above content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent changes. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.