Significant Changes Ahead: MULTIPLICATION OF THE SMALL BUSINESS DEDUCTION (SBD)

Measures were proposed in the 2016 Federal Budget to prevent certain corporations from multiplying access to the $500,000 SBD. Some proposals include:

  • Eliminating multiplication of the SBD in “complex partnership structures” where payments are sent from a partnership to non-partner corporations owned by partners, or those related to partners. Broadly speaking, this planning structure enabled each partner to benefit from the lower small business tax rate on up to $500,000 in income earned through a personally owned corporation. The changes propose that essentially only one $500,000 SBD limit will be available to the partnership, and related corporations, as a whole (barring access to certain exceptions).

A number of professional services firms (e.g. medical professionals, accountants, lawyers etc.) use a structure like this and will be affected by the change.

  • Eliminating multiplication of the SBD where fees are paid between corporations where there is a common ownership. Basically, these new rules generally restrict access to the SBD on any active business income earned by one Canadian Controlled Private Corporation (CCPC) from providing services or property to another private corporation where the recipient CCPC, any of its shareholders, or anyone related to those shareholders, holds any ownership interest in the payor (with certain exceptions).

This broadly-phrased provision will apply to many structures which, for example, pay intercorporate management fees.

These measures will apply to taxation years that begin on or after Budget Day, March 22, 2016.

Action Item: Be prepared for changes in tax liabilities if your corporate or partnership structure fall within the proposed changes.

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