The section 125 small business deduction (SBD)
is a tax policy tool that the Canadian government uses to encourage
private businesses in Canada. However, the SBD applies to only the
first $500,000 of income of an eligible CCPC. This $500,000 income
cap is the “business limit” of the corporation, and it
is shared between associated CCPCs. To prevent the SBD from being
multiplied through the splitting of income into two or more
associated CCPCs each having income under the business limit, the
ITA has various rules that force associated CCPCs to share one
business limit and to reduce the shared business limit based on the
taxable capital limit of the CCPC and associated CCPCs.
The 2016 Legislative Proposals include amendments designed to
supplement these rules while attempting to “[strike] a
balance between allowing different family members to carry on
businesses through CCPC’s […] and addressing tax
planning arrangements used by a single economic group as an attempt
to multiply the small business deduction”. Section 125 will
be amended, as explained in our article Multiplication of
the Small Business Deduction. This article addresses the
proposed changes to subsection 256(2), which deems unassociated
CCPCs to be associated in certain circumstances.
Currently, subsection 256(2) deems two corporations that would
otherwise not be associated with each other to be associated if
each corporation is associated with the same third corporation.
Pursuant to subsection 256(2), all three corporations are deemed to
be associated and, therefore, share a single business limit and
taxable capital limit. However, if the third corporation is not a
CCPC or if the third corporation is a CCPC and elects in the
prescribed form, then the third corporation is deemed not to be
associated with either of the two corporations and its own business
limit is deemed to be nil.
The first amendment to subsection 256(2) is structural – a
division of the subsection into paragraphs (a) and (b). Proposed
paragraph (a) applies for the purposes of the entire ITA and
contains the same deeming rule as the current subsection 256(2):
two corporations are deemed to be associated with each other if
they would not otherwise be associated with each other but are each
associated with the same third corporation.
Paragraph (b) applies only for the purposes of section 125 and
contains the exceptions to the deeming rule in paragraph (a). The
amendment limits the disassociating power of subsection 256(2). As
with the current rules, if the third corporation is not a CCPC, the
other two corporations are deemed not to be associated with each
other. However, under the proposed amendments, each of the two
corporations remains associated with the third corporation.
Similarly, if the third corporation is a CCPC and elects for its
own business limit to be nil, each of the two corporations remain
associated with the third corporation.
The most important result of this change is that the taxable
capital of the third corporation will now be included in
calculations under subsection 125(5.1), which reduces the business
limit based on the taxable capital of the corporation and
A related amendment is proposed to subsection 125(1) related to
income from property of a CCPC that is deemed to be active business
income where one of the exceptions of 256(2) applies.
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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