Immigrants to Canada have access to one of the world’s most competitive tax regimes for starting a new business. An important advantage enjoyed by business owners is a low tax rate applicable to active business income earned in Canada. This is called the “small business deduction”.
Small Business Deduction : Important Inventives for New Businesses in Canada
Generally, business income earned in Canada is subject to a general federal tax rate of 15%. In addition, all provinces tax business income at rates ranging from 10 to 16%, depending on the province. As a result, the total combined rate may vary from 25 to 31%, depending on the province. The small business deduction reduces the tax rate applicable to the first $500,000 of business income from 15% to 10.5% at the federal level, and significant reductions also apply to rates charged by provinces.
For example, the combined federal/provincial general tax rate on corporate business income in Ontario is 26.5%, but the combined rate for income qualifying for the small business deduction is reduced to 15%. In Quebec, the rates are reduced from 26.9% to 18.5%. The reduced tax rates for small businesses by province are provided in the table below.
| Combined Federal/Provincial Corporate Income Tax Rates | |||
| General Rate | Small Business Rate | Income Eligible for the Small Business Rate | |
| Alberta | 27% | 13.5% | $500,000 |
| British Columbia | 26% | 13% | $500,000 |
| Manitoba | 27% | 10.5% | $450,000 |
| New Brunswick | 29% | 14.5% | $500,000 |
| Newfoundland & Labrador | 30% | 13.5% | $500,000 |
| Nova Scotia | 31% | 13.5% | $350,000 |
| Northwest Territories | 26.5% | 14.5% | $500,000 |
| Nunavut | 27% | 14.5% | $500,000 |
| Ontario | 26.5% | 15% | $500,000 |
| Prince Edward Island | 31% | 15% | $500,000 |
| Quebec | 26.9% | 18.5% | $500,000 |
| Saskatchewan | 27% | 12.5% | $500,000 |
| Yukon | 30% | 13.5% | $500,000 |
Thus, in most cases, the regular rates on the amount of eligible business income are reduced in half for small companies carried on business in Canada. In comparison, in the Unites States a small business will generally pay corporate tax at the rate of approximately 40% and in France at the rate of approximately 35%.
| Canadian Resident | U.S. Resident | French Resident |
| Canadian Business (Ontario) | U.S. Business | French Business |
| Business Income : $500,000 Tax: $132,500 | Business Income : $500,000 Tax: $200,000 | Business Income: $500,000 Tax: $175,000 |
| After-tax profit: $367,500 | After-tax profit: $300,000 | After-tax profit: $325,000 |
The low small business tax rate can result in a significant deferral of personal taxes if the money is kept in the business instead of being paid to the owner as a salary, bonus or dividend. The government has provided this incentive to encourage small businesses to reinvest their earnings for business expansion, job creation and investment.
The small business deduction only applies to “small businesses”. The government has set the level at which a private corporate group is no longer considered “small” by using the concept of “taxable capital”. A corporation’s taxable capital essentially consists of its debt and equity, less deductions for certain investment assets. The small business deduction threshold is reduced on a straight-line basis when an associated corporate group’s taxable capital employed in Canada in the preceding year is between $10 million and $15 million, and is completely eliminated when taxable capital exceeds $15 million. For example, if the associate corporate group’s taxable capital is $12.5 million, the reduced tax rates will only apply to the first $250,000 of business income.
Corporations that are controlled by non-residents do not qualify for the reduced tax rates, even if they are small. Therefore, if a Canadian business has several owners, – for example, several family members some of whom may not live in Canada, – it is important to ensure that the control of the business is with Canadian residents in order for the small business deduction to be available.
Investment income earned by a private corporation controlled by Canadian residents does not qualify for the small business deduction and is subject to tax at the rate of 49.67-53.67%, depending on the province.
The small business deduction is especially important to new immigrants as a leading study gives conclusive evidence that immigrants are far more likely to own businesses than their Canadian counterparts, a key component for economic growth. Released in March 2016 and entitled Immigration, Business Ownership and Employment in Canada, the study concludes that ‘rates of private business ownership and unincorporated self-employment are higher among immigrants than among the Canadian-born population’. We know this officially for the first time because data based on immigrant business ownership has only recently become available with the introduction of the Canadian Employer-Employee Dynamics Database, which you can access here.
Intending business immigrants to Canada are advised to review these and other considerations to ensure the best strategic corporate practices.
This article was prepared with the generous assistance of Cragmore (www.cragmore.com), a Canadian law firm specializing in international tax.
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