Now that the new federal Liberal government's first budget
has been introduced, we can focus our attention on those measures
that actually have been put forward rather than on those that
everyone speculated might be put forward.
This is particularly the case with entrepreneurs, where it was
feared that the small business deduction would be eliminated for
many businesses engaged in providing services. The good news is
that the small business deduction has not been eliminated
for these businesses, but the bad news is that it has been
As most entrepreneurs are aware, a Canadian-controlled private
corporation engaged in an "active business" (which
includes the provision of services) is entitled to a small business
deduction for its first $500,000 of annual active business
In Ontario, the combined federal and provincial corporate tax
rate on qualifying income is 15 percent. This represents a
Where taxpayers, such as professionals, are engaged in providing
services through a partnership, a corporation's entitlement to
this low rate is restricted to its pro-rata share of the
partnership's income; i.e.: if a corporate partner is entitled
to 10 percent of the partnership's profits, then its small
business rate would be limited to $50,000 of income per annum.
As a result, various structures have been developed to
circumvent this restriction. For example, lawyers who practice in
partnership through corporations may, in addition to sharing the
partnership income, bill the partnership directly for services
provided by the individual. In this way the income derived from
services provided to the partnership does not form part of the
partnership income and is therefore not subject to the
Similarly, a husband and wife may be engaged together in a
business venture. Corporation A may be solely controlled by the
wife and earn the income from the business venture directly.
Corporation B may be solely owned by the husband and may bill
Corporation A for services provided to the business. In this way
the husband and wife's business could potentially generate $1
million per annum subject to the small business deduction.
The budget proposes to curtail these practices in a similar way.
In the case of partnerships, the income earned by a corporation
providing services to the partnership will be deemed to be
partnership income (and thus subject to the apportionment
restriction) where there is a non-arm's length relationship
between shareholder of the service corporation and a member of the
partnership. In the case of services being provided by one
corporation to another, there will be no small business deduction
available for service income where there is a similar non-arm's
length relationship between the shareholders of the two
corporations. Thus, access to the low corporate tax rate will be
limited in the case of both professionals and business
Having said all of this, there is a long road between
introduction of the proposed measures in a budget and
implementation through legislation. Although we have a majority
government, there could be either tweaks or significant amendments
to this proposed legislation as a result of lobbying from various
industry groups. We have already heard a suggestion that the
Department of Finance is considering exempting medical
professionals from this new measure. We will continue to monitor
the legislation and advise our clients of the final results.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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