How is a corporation defined as a small business in Ontario for tax purposes?
Posted on June 1, 2009 by admin
Tina s asked:
Is it based on net income? or Total Revenue before cost deduction? or based on number of employees hired? or …?
Is it based on net income? or Total Revenue before cost deduction? or based on number of employees hired? or …?
The only answer I was able to find for you was on the CRA’s website for Corporate income taxes.
I found a section on which corporations could claim the Small Business deduction. The formula for determining the deduction uses income as the criteria
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Note: For 2007, the business limit is $400,000
source:
Corporations that were Canadian-controlled private corporations (CCPCs) throughout the tax year may be able to claim the small business deduction (SBD). The SBD reduces Part I tax that the corporation would otherwise have to pay.
The SBD rate is currently 16%.
The SBD rate is increased to 17%, effective January 1, 2008. The rate is prorated for tax years that straddle December 31, 2007.
The SBD is calculated by multiplying the SBD rate by the least of the following amounts:
* the income from active business carried on in Canada (line 400);
* the taxable income (line 405);
* the business limit (line 410); or
* the reduced business limit (line 425).
The following section explains each of the above amounts.
Once you have calculated the SBD, enter it on line 430.
The link the above poster provided also shows you the definition of both the personal service business and a specified investment business. Both of those are exceptions to the general rule of $400,000. Have a good look at those definitions. If you are a small business with fewer than 5 employees that has decided to incorporate, and you are essentially “me Inc”. In that case, you are not a small business corporation, you are a personal service business, and you might end up paying more tax by incorporating.
I am a Chartered Accountant and I can give you some quick insight.
It is based on net income of $400,000, but the income must be from “Active Business Income”. For income over $400,000, you will pay the regular tax rate around 35%.
You don’t need to have 5 full-time employees to qualify as Active Business Income, as long as the income is from a real operating business, like a cafe, restaurant, corner store etc. There are many small business who does not have 5 full-time employees but they still qualify for small business deduction.
Active Business Income does not just income from properties (rental) or Personal Service Business (employees who incorporated themselves to work for one client), unless you have more than 5 full-time employees.