Principal Issues: [TaxInterpretations translation] Can the corporation owned by the taxpayer claim the small business deduction?
Position: Question of fact. We provided general comments to the taxpayer.
Reasons: Income Tax Act
XXXXXXXXXX 2010-038075
March 3, 2011
Dear Sir,
Subject: Small business deduction
This is in response to your e-mail of September 16, 2010, in which you inquired as to whether your corporation could be entitled to the small business deduction ("SBD") provided under section 125 of the Income Tax Act (the "Act").
Unless otherwise specified, all legislative references in this document are to the provisions of the Act.
More specifically, you indicated that you control a corporation that carries on a business under a franchise agreement. You are responsible for managing a convenience store and paying employees. However, you state that you are not responsible for rent, inventory purchases and electricity costs. Every two weeks, you receive a sales commission out of which you must pay your employees, cover stolen inventory and, if necessary, cover any shortfalls.
You wish to know if your corporation can deduct from its tax otherwise payable for a taxation year the amount commonly referred to as the "small business deduction".
Our Comments
It appears to us that the situation described in your letter and summarized above could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and a transaction or transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for its opinion. However, we are able to provide you with the following general comments that may be useful to you.
The Act provides for a reduction in corporate income tax, i.e., the SBD, on income earned by a Canadian-controlled private corporation ("CCPC") from businesses that it actively carries on in Canada.
Generally, to qualify as a CCPC, a corporation must not be controlled, directly or indirectly, in any manner whatever, by public corporations (i.e., corporations traded on a stock exchange), non-residents or a combination of public corporations and non-residents.
The SBD is in the form of an annual tax credit equal to 16% of the least of the following amounts:
(a) the corporation's total income for the year from an active business;
(b) the corporation's taxable income for the year (subject to certain adjustments);
(c) the corporation's "business limit" for the year (currently $500,000).
The corporation must have been a CCPC throughout a taxation year in order to be eligible for the SBD.
The question of whether your corporation can claim the SBD for a particular taxation year is one that we cannot comment on. That determination is based on your corporation's qualification as a CCPC and the fact that it must derive income from an active business carried on in Canada. We encourage you to consult your local tax services office ("TSO") for more information. Based on your contact information, you should contact the Laval TSO, which is located at 3400 Jean-Béraud Avenue in Laval. To book an appointment, you can call 1-800-959-8281 (for individuals) or 1-800-959-5525 (for businesses and the self-employed).
Finally, we invite you to consult Interpretation Bulletin IT-73R6, The Small Business Deduction and IT-458R2, Canadian-Controlled Private Corporation, for more information. These Bulletins can be found on the Canada Revenue Agency's website at http://www.cra-arc.gc.ca/menu/ITSC-e.html
We hope that the above comments will be of assistance and will answer your questions.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.