Canada: Think The New Small Business Deduction Rules Don't Affect You? Think Again!

Last Updated: July 25 2016
Article by Darryl Antel and Laura R. Shylko

Proposed amendments to the Income Tax Act introduced in the 2016 Federal Budget will significantly alter the Small Business Deduction (SBD) scheme for taxation years that begin following March 21, 2016. An admittedly over-simplification of the complexities of these amendments is that they aim to restrict the multiplication of the SBD in which unassociated corporations provide services to a partnership or corporation a partner or shareholder of which is not at arm's length with the service-providing corporation. A simple example of this is HusbandCo providing services to WifeCo. There has been much discussion, and there is sure to be more, on the application of these amendments to the structures they are intended to effect; however, that is not the subject of this blog.

The breadth of these amendments reaches the most basic of planning and circumstances, and all practitioners should be aware – as we'll describe in a couple of situations below.

Situation #1 – Consider the very 'run-of-the-mill' sister structure of OpCo and LandCo. OpCo and LandCo are family-owned. OpCo operates the business of the family and LandCo owns a building that is leased to OpCo as the office or retail space for the business. This is a very common structure implemented for creditor-proofing and other purposes.

As in previous years, OpCo and LandCo make an agreement allocating the SBD they share as associated corporations. By virtue of existing subsection 129(6), LandCo's lease revenue from OpCo is deemed active business income to which LandCo's allocated portion of the OpCo-LandCo shared SBD may be applied... Right? Wrong! Not anymore, at least not without more from the tax preparers for OpCo and LandCo.

LandCo's lease revenue from OpCo is income meeting the description in subparagraph (a)(i) of the proposed definition for "specified corporate income" in subsection 125(7). The shareholders of LandCo directly or indirectly hold an interest in OpCo and substantially all of LandCo's active business income is from OpCo. This income is 'carved-out' from the SBD, unless OpCo assigns a portion of its business limit to LandCo. Proposed subsection 125(3.2) provides that the assignment be made by prescribed form filed by (i) the payor corporation (OpCo) in its return of income for its taxation year and (ii) the recipient corporation (LandCo) in its return of income for its taxation year. In short, the existing benefits and effects of this common structure can still be achieved, but only if the tax preparers for OpCo and LandCo recognize that the proposed amendments require additional filings.

Situation #2 – The proposed amendments will have a greater effect when a corporation earns active business income from a private corporation that has a shareholder dealing not at arm's length with the first corporation, no matter how small that shareholder's interest. Consider the following example: Mr. X operates his business through a corporation (ElectricalCo). ElectricalCo is awarded a contract by a private corporation (ConstructionCo). The contract is significant and represents 40 per cent of ElectricalCo's active business income for the year. Mr. X's brother happens to be an employee of ConstructionCo and ConstructionCo has an employee stock option program in which Mr. X's brother participates (e.g. Mr. X's brother has a 3 per cent interest in ConstructionCo).

Similar to situation #1 above, ElectricalCo's active business income from the ConstructionCo contract is income meeting the description in subparagraph (a)(i) of the proposed definition for "specified corporate income" in subsection 125(7). A person who does not deal at arm's length with Mr. X and ElectricalCo (i.e. Mr. X's brother) holds an interest in ConstructionCo (the insignificance of that interest is not consequential); and it cannot be said that substantially all of ElectricalCo's active business income for the year is from sources other than ConstructionCo, given that that income represents 40 per cent of ElectricalCo's active business income for the year. Accordingly, the income from the ConstructionCo contract is 'carved-out' of ElectricalCo's SBD, unless the subsection 125(3.2) assignment is made. However, unlike in situation #1, ConstructionCo and ElectricalCo deal at arm's length, so it is difficult to imagine ConstructionCo assigning a portion of its business limit to ElectricalCo.

Suppose ElectricalCo had $500,000 of active business income for the year, including $200,000 of income from the ConstructionCo contract. The loss of the SBD on the ConstructionCo contract income eliminates the 13.5 per cent deferral on that $200,000 ($27,000) and bears a $3,680 increased overall tax cost of paying out the income as dividends.[1]

The workings of the proposed amendments to the SBD regime are complex. The above examples serve only to demonstrate the potential far-reaching application of the amendments. Variations of these examples may have similar consequences and other considerations may be at play as well, such as the extent of the assignee-corporation's active business income, which will not be caught by the proposed amendments. Nevertheless, the examples highlight that all business owners and their advisors need to review the application of the SBD to their active business income, including the source of that income. Active business income from a source in which a party not at arm's length has a direct or indirect interest, no matter the size of that interest, is cause for a second look.


[1] 2016 Alberta highest rates assumed.

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Darryl Antel
Events from this Firm
1 Dec 2018, Seminar, Toronto, Canada

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad.

5 Dec 2018, Webinar, Calgary, Canada

This technical session will be of interest to advisors to private businesses (accountants, lawyers, investment and insurance advisors, bankers, trust officers and others) and business owners

6 Dec 2018, Webinar, Calgary, Canada

This 90-minute session will review last-minute planning for owner-managers and their advisors to consider before January 1, 2019.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions