The Canada Small Business Deduction (SBD) is a significant tax deduction made available to some Canadian corporations.
If you are a high earning individual in Canada, you may be paying upwards of 40% in income tax as a sole proprietor, making it very attractive for entrepreneurs to incorporate.
What type of corporations are eligible for the SBD?
- The business must be incorporated, as a Canadian Controlled Private Corporation.
- The business must be controlled by a Canadian (at least 51% ownership)
- The business must be earning ACTIVE income (not investment income, not capital gains, and not real estate rental income)
The first $500K in profit (revenue minus expenses) tax can be reduced from around 26.5% (15% federal +11.5% provincial) to around 12.2% (9% federal + 3.2% provincial).
If your business makes a profit in excess of $500K, then that marginal amount will be taxed at the regular rate of 26.5%, in which case, it may make sense to issue a bonus to the owners to bring the corporate profit down to under $500K.
References:
https://www.taxtips.ca/taxrates/canada.htm
https://www.taxtips.ca/taxrates/on.htm