CPABC in Focus November/December 2016 - Page 32

New Legislation on the Small Business Deduction – Is This the End of Claiming Multiple SBD? By Edmund Chow, CPA, CGA Edmund Chow is a senior manager of the tax group at Smythe LLP in Vancouver, where he specializes in tax compliance and advisory services for owner-managed businesses. T he availability of the small business deduction (SBD) is one of the most favourable tax attributes for companies that qualify as Canadian-controlled private corporations (CCPCs). A CCPC that is earning “active business income” in Canada and is taxed in BC has its combined federal and provincial tax rate reduced from 26% to 13%, up to the $500,000 “business limit” shared with “associated corporations.” Recognizing this favourable tax treatment, corporate taxpayers have been creative in implementing business structures to multiply their access to the SBD. Changes designed to eliminate multiplication of the SBD were initially proposed in the March 22, 2016 federal budget. Draft legislation for these changes was later released for consultation by the Department of Finance on July 29, 2016. The proposed SBD rules would be effective for corporate taxation years beginning on or after March 22, 2016. 32 CPABC in Focus • Nov/Dec 2016 The purpose of this article is not to walk through the changes made to section 125 of the Income Tax Act (the Act), but to focus on how the proposed tax rules would affect two business structures commonly used to multiply the SBD. 1. Using a partnership and “service corporation” One of the most common methods used to multiply SBD is to place a partnership at the core of a corporate group. Under the “specified partnership income” rules, corporate partners share the $500,000 business limit based on the pro-rata allocation (to said partners) of the partnership’s income from an active business carried on in Canada. Creative taxpayers have developed various structures so that the corporations they or their spouses own can receive income directly or indirectly derived from the partnership that is not considered specified partnership income. Typically, these non-partner corporations are called “service corporations” because they provide professional, administration, or management services—either to the incorporated partner or to the partnership itself. A service corporation is associated with the corporate partner, but it is not a partner of the partnership; as such, it potentially enables each partner to benefit from the full $500,000 business limit, rather than requiring partners to share the $500,000 business limit as a group. These structures are set up for sound business reasons, and the Canada Revenue Agency has issued numerous rulings to confirm that they’re permissible. Nevertheless, the definition of “specified partnership income” has been expanded in the draft legislation to eliminate this multiplication of the business limit. Under the proposed rules, a corporation that is a “designated member” would effectively have to share a portion of the business limit allocated by the partnership to a partner or corporate partner with which the designated member does not deal at arm’s length.